Market Structures

Question 1

Define Allocative efficiency

Answer 1

It will occur when the value to society from consumption is equal to the
marginal cost of production, where P=MC.

Question 2

Define Productive efficiency

Answer 2

This can only exist if firms produce at the bottom of the AC curve, in the short run this
is where MC=AC

Question 3

Define Dynamic efficiency

Answer 3

This is achieved when resources are allocated efficiently over time. It is concerned with investment, which brings new products and new production techniques

Question 4

Define X- inefficiency

Answer 4

If a firm fails to minimise its average costs at a given level of output, it is X-inefficient and there is organisational slack. This is a specific type of productive inefficiency as it occurs when they fail to minimise their cost for that specific output

Question 5

Give 4 characteristics of perfect competition

Answer 5

1. many buyers and sellers
   2.freedom of entry and exit
   3.homogenous products
   4.perfect knowledge

Question 6

What type of efficiency does a perfectly competitive market have?

Answer 6

1. They are productively efficient
2. They are allocatively efficienct
3. they aren’t dynamically efficient

Question 7

Give 4 characteristics of Monopolistic Competition

Answer 7

1. There are a large number of buyers and sellers
   2.There are no barries of entry and exit
2. Products are non-homogenous
   4.Frims have some price-setting power

Question 8

What type of efficiency does a monopolistic competition have?

Answer 8

1.They are not productively or allocatively efficient
2.Dynamically efficient
3.May be able to enjoy some economies of scale

Question 9

Give 4 characteristics of an Oligopoly

Answer 9

1. Products are differentiated
2. firms act interdependently
3. There are high barriers of entry and exit
4. High-concerntration ratio

Question 10

What is collusive behaviour?

Answer 10

When 2 or more firms make a formal agreement that reduces competition

Question 11

Give 4 characteristics of a Monopoly

Answer 11

1.There are high barriers of entry and exit
2.There is solely one buyer/producer in the market
3.They short run profit maximise

Question 12

What is price discrimination?

Answer 12

When a firm charges people different prices for a good or sevice

Question 13

What are the conditions to price discriminate?

Answer 13

1. A firm must be able to clearly seperate the market into different groups of buyers
   2.The customers must have different elasticities of demand
   3.Firms must be able to control supply

Question 14

Name some costs and benefits of price discrimination

Answer 14

1.Firms benefit as they’re able to increase their profits
2.Those in the elastic market are able to pay lower prices
3. Some Consumer surplus is lost

Question 15

Give 2 characteristics of a monopsony

Answer 15

1. Only one buyer in the market
   2.Supplieres will be payed to lowest possible amount

Question 16

Name some costs and benefits of a monospony to firms

Answer 16

1. The monopsony gains higher profits from being able to buy supply at lower price
2. They achieve purchasing economies of scale

Question 17

Name some costs and benefits of a monopsony to consumers

Answer 17

1.Consumers may gain from lower prices
2. There may be fall in quality as prices go down

Question 18

Name some costs and benefits of a monoposony to employees

Answer 18

1. Suppliers will sell less goods therefore employing less people
   2.Monopsonists will employ less people since they have less inputs
   3.Monopsonists may give higher wages as they see more profit

Question 19

Give 4 characteristics of a contestable market

Answer 19

1. There is perfect knowledge
   2.There is freedom of entry and exit
2. There is low product loyalty
3. Firms are short run profit maximisers and dont collude

Question 20

What are some implications of a contestable market?

Answer 20

1. Firms will enter the market if they see other firms making abnormal profits , and they’ll remain until competition prevents them from making a profit , the only way to prevent this is limit pricing
2. Firms are likely to be productively and allocatively efficient

Question 21

What are 4 types of barriers of entry and exit

Answer 21

1. Legal barriers - patents and exclusive rights to production
2. Marketing barriers - High levels of advertising builds up brand loyalty
   3.High capital start up costs
   4.Economies of Scale