Market structure: perfect competition and monopoly Flashcards
When does productive efficiency occur?
When firms produce at minimum long-run average cost by:
* choosing appropriate combinations of factors of production, and
* producing maximum possible output from those inputs
What three questions should a firm consider when trying to get to productive efficiency?
- How much output do we want to produce?
- Given that required output, what combination of factors should we choose?
- How do we produce that output using those factors at the minimum cost?
What is X-inefficiency?
when a firm is not operating at minimum cost
When is allocative inefficiency achieved?
when society is producing the appropriate bundle of goods and services relative to consume preferences
When there is X-inefficiency is the long-run average cost curve above or below the most efficient long-run average cost curve?
above
In an individual market, what should price be equal to when there is allocative efficiency?
marginal cost
How does dynamic efficiency differ from static efficiency?
dynamic efficiency takes into account effect of innovation and technical progress on productive and allocative efficiency in the long run; static efficiency does not
How do static and dynamic efficiency interact?
To achieve dynamic efficiency, you may need to sacrifice static efficiency by investing in eg research and development.
When there is perfect competition, can an individual firm influence price?
no
Give an example of a market with perfect competition.
cauliflowers or carrots
When there is perfect competition, can firms easily enter and exit the market?
yes
How many firms are in the market in a monopoly?
one
Give an example of a near-monopoly.
Describe monopolistic competition.
Many firms in the market with similar but not identical products
Give an example of monopolistic competition.
small local Indian restaurants
What are the characteristics of an oligopoly?
- a few firms
- some barriers to entry
- some influence on price
Define barrier to entry.
a characteristic of the market that prevents new firms from readily joining it
Define perfect competition.
a market structure that produces allocative and productive efficiency in long-run equilibrium
Give the six assumptions of perfect competition.
- Firms aim to maximise profits.
- Many buyers and sellers, none of whom is large enough to influence price
- Homogeneous product
- No barriers to entry or exit from the market
- Perfect knowledge of market conditions
- No externalities
Define price taker.
firm that must accept the price set in the whole market
What shape is the demand curve if there is perfect competition?
flat, ie demand is perfectly elastic
If there is perfect competition, how do average and marginal revenue compare?
average revenue = marginal revenue = price
Has the internet made perfect competition more or less likely than pre-internet?
More, as more information available to buyers, eg price comparison websites
Is productive efficiency achieved under perfect competition?
Yes in the long run, as long-run equilibrium is at minimum point on long-run average cost curve
Is productive efficiency achieved under monopoly?
No, long-run equilibrium will only be at minimum point on long-run average cost curve by coincidence; little incentive to be productively efficient when there are barriers to entry
Is allocative efficiency achieved under perfect competition?
yes, in short and long run, as price = marginal cost
Is dynamic efficiency achieved under monopoly?
It can be, as monopoly firms makes supernormal profits so could use them for research and development
Is allocative efficiency achieved under monopoly?
no, as price > marginal cost
Is dynamic efficiency achieved under perfect competition?
No, as firms make normal profits with no surplus available for investment or innovation
What three conditions hold in a monopoly?
- single seller of the good
- no actual or potential substitutes for the good
- barriers to market entry
Is a monopoly firm a price taker or price maker?
price maker
What happens to a monopoly’s profits if demand increases?
Profits increase as sell more and sell at higher price
Give four reasons that a monopoly might arise.
- government creates a monopoly
- product is patented
- natural monopoly, eg due to economies of scale
- establishment of widely accepted standard / new product then effective marketing
How will price compare under monopoly and perfect competition?
monopoly price higher
How will output compare under monopoly and perfect competition?
monopoly output lower
Define third-degree price discrimination.
when a firm is able to charge groups of consumers a different price for the same product
What four conditions are needed for third-degree price discrimination?
- Firm must have market power.
- Firm must have information about consumers’ willingness to pay.
- Must be identifiable differences between consumers.
- Consumers must have limited ability to resell (so arbitrage not possible).
What is arbitrage?
process by which prices in two market segments are equalised by the purchase and resale of products
