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Econ - T3 - Micro > Market Structures > Flashcards

Market Structures Flashcards

1
Q

Name the 4 types of Efficiency?

A
  • Allocative –> P=MC (D=S) –> Price charged maximises social welfare, taking consumer + Producer welfare into account
  • Productive –> MC= AC (P=MinAC) –> Point AC is lowest –>Maximises Consumer Surplus, as Price is at lowest point
  • Dynamic –> Companies invest profits / resources into become more efficient. productive over time e.g. R&D
  • X-Inefficiency –> inefficiency occurs with lack of competitive pressure in market –> occurs in monopolies or subsidies –> little incentive to minimise AC
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2
Q

Why is Productive Efficiency not common in markets?

A
  • Little incentive for firm to operate at Productive efficiency, and offer lowest price
  • P=MinAC
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3
Q

What are the 4 Market Structures

A
  • Perfect Competition
  • Monopolistic Competition
  • Oligopoly
  • Monopoly
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4
Q

What Markets structures are Productively efficient in the SR?

A
  • SR = at least one factor of production fixed
  • Productively Efficient = MC= AC (P=MinAC)
    –> Point AC is lowest –>Maximises Consumer Surplus, as Price is at lowest point
  • None of them
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5
Q

What Market Structures are Productively Efficient in the LR

A

LR = All factors of production are variable
- Productively Efficient = MC=AC (P=MinAC) –> Point AC is lowest
- Perfect Competition

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6
Q

What Market Structures are Allocatively Efficient in SR

A

SR = at least one FoP variable
- Allocatively Efficient = P=MC (D=S)
–> Price charged maximises social welfare, taking consumer + Producer welfare into account
- Perfect Competition

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7
Q

What Market Structures are Allocatively Efficient in LR

A

LR= All FoP variable
- Allocatively = P=MC (D=S) –> social welfare maximised
- Perfect Competition

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8
Q

List the conditions for Perfect Competition

A
  • Firms are Price takers –> AR=MR
  • Goods homogenous
  • No barriers to entry or exit
  • Firms aim to maximise profits
  • Perfect information
  • Many small firms
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9
Q

Market structures from most –> least competitive

A
  • Perfect competition
  • Monopolistic competition
  • Oligopoly
  • Monopoly
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10
Q

Assumption made with Market structures (e.g. the goal of the firms)

A
  • All firms are profit maximisers (MR=MC)
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11
Q

In Long Run what happens to profits in Perfect Competition?

A
  • In the Long Run all profits become normal profits
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12
Q

Market Structure definition?

A

The market environment within which firms operate

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13
Q

When drawing a Normal Profits diagram where is the AC curve?

A

On the intersect of the (D=AR=MR) and (MC) curves

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14
Q

Draw Super-normal profit diagram for Price takers + Price Makers

A

Takers
AC curve - below intersect of the (D=AR=MR) and (MC) curves

Makers
im really not sure, sorry

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15
Q

When drawing a Losses diagram where is the AC curve?

A

Above the intersect of the (D=AR=MR) and (MC) curves

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16
Q

Why, in a perfect market, does supernormal profits turn into Normal profits in the Long-Run

A
  • Super Normal profits attract suppliers, they enter the market easily (due to no barriers to entry)
  • S Curve shifts right, Supply ↑ –> P↓ (P1–> P2)
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17
Q

Why, in a perfect market, does losses turn into Normal profits in the Long-Run?

A
  • When firms are making a loss, some decide to shut
  • When they do, Supply curve shifts left
  • P↑
  • Remaining firms face less competition, sell more Q↑
    Process stops when Normal Profits occur
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18
Q
A
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19
Q

What is the Main difference between Monopolistic Competition and Perfect Competition?

A
  • Monopolistic has differentiated products giving firms some influence over price making and D/AR curve downwards sloping
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20
Q

What are the Characteristics of Monopolistic competition?

A
  • Many Firms
  • Low barriers to entry and exit
  • Goods differentiated
  • Firms are Price makers –> Downward sloping D/AR curve –> MR Curve 1/2 AR
  • Firms aim to maximise profits, Produce at MR=MC
21
Q

In Monopolistic Competition what happens when Super-Normal Profits occur?

A
  • In LR SNP act as incentive/ signal to other firms to enter market
  • low barriers to entry mean firms can easily enter until Normal profits occur
  • In LR will only make Normal Profits
22
Q

What is an Oligopoly? + Key characteristics?

A
  • When a few firms dominate the market
  • High Concentration Ratio
  • High Barriers to entry + Exit
  • Firms are interdependent –> actions of one firm dependent on action of other e.g. price, output, adverts
  • Product differentiation
  • Downwards sloping D/ AR curve
23
Q

Concentration ratio Definition?

A

Proportion of the market supplied by the number / larger firms in industry

24
Q

What does a high concentration ratio mean?

A
  • industry is dominated by a few firms with high degree of monopoly powers
  • CR5 over 50% means oligopoly
    –> lower ratio = more competitive = customers less exploited
25
Q

What is Collusion in Oligopoly?

A
  • When firms collaborate with other firms in market –> e.g. agree to set Price at above Market Price so both enjoy SNP
26
Q

What is a reason for Collusive behaviour?

A
  • Enables firms to ↑Profits
    –> believe CMA wont realise
27
Q

What are 3 reasons for non-collusive behaviours?

A
  • No trust between firms
  • Possibility of new entry into market, who can offer product at Lower P
  • High penalties for being found guilty
28
Q

What are the 2 types of collusion + definition?

A
  • Overt –> direct contact between firms, formal agreement to control market by fixing prices, illegal
  • Tacit –> Firms act individually but jointly exercise market powers e.g. following market leader in raising prices –> unspoken agreement, also illegal but hard to control
29
Q

What is a cartel?

A
  • Firms in oligopoly acting as a monopoly through agreement
    –> form of overt collusion
30
Q

What are the 5 types of Pricing Strategies

A
  • Predatory Pricing –> illegal (CMA) When prices are set below AVC to drive competitors out
  • Limit pricing –> prices are set below the profit maximising price but not so low losses are made (lower prices a lot but not to make loses)
  • Pricing-meet the objectives –> Profit Max (MR=MC), Revenue Max (MR=0), Sales Max (AR=AC) (diagram)
  • Cost-plus or Mark-up pricing –> firm calculates AC and add mark-up to make profits (used in irl)
  • Price Wars
31
Q

List some types of non-price competition / strategies?

A
  • Advertising / branding
  • Design
  • Reliability
  • Costumer Service

–> aim to ↑D

32
Q

Pure Monopoly Vs. Legal Monopoly + Example

A

Pure
- One firm supplying whole market

Legal
- One firm has 25% or more of market share
- Google 90% search engine traffic
- Tesco 30%

33
Q

Characteristics of Monopoly Competition?

A
  • One firm in market
  • High barriers to entry
    –> Able to make SNP in LR and SR
  • Price makers –> Downward Sloping D/AR curve + MR 1/2 AR
34
Q

What types of efficiency is Monopoly?

A
  • Dynamic –> Invest in R&D –> Yes
  • Productive –> P=MinAC –> Probably not, Firm wants profit
  • Allocative –> D=S –> Social Welfare maximised –> No, monopoly sell lower output to maximise profit
    -X-Inefficient –> Inefficient –> no other firms
35
Q

Benefits + Costs of Monopoly Competition for Consumers?

A

Benefits
- Dynamically Efficient –> able to Invest in R&D + Innovate develop new / better products
- ↓Price –> Monopoly can produce at Low AC (e.g. ↑EOS) –> can offer lower price

Disadvantages
-Less Choice –> one firm compared to many small one
- ↑Price –> ↓ Supply/ ↑P –> maximise Profit
- ↓Quality –> no competition, no incentive to produce high Quality
- X-inefficient –> ↑Cost for Business, ↑Cost for Consumer

36
Q

Benefits (two) + Costs (two) of Monopoly for Workers?

A

Advantages
- Job Security –> firm faces no competition, likely to have steady D –> firm wont shut down
- ↑Pay –> ↑Profits for firm mean firm can afford ↑Wages

Disadvantages
- Weak Bargaining power –> Unhappy workers cannot transfer firms –> Means wages can be low
- Machinery replace workers –> Dynamic efficiency lead to automation

37
Q

Benefits + Costs of Monopoly for Government?

A

Advantages
- ↑Tax Revenue –> Large firm ↑Profit –> ↑Cooperation Tax
- ↓Unemployment –> Monopoly power keeps jobs in country –> Improve Balance of Payments

Disadvantages
- Tax Avoidance –> Especially Transnational
- ↑Inflation –> No competition –> ↑Prices –> Inflationary Wage-Price spiral

38
Q

Costs + Benefits of Monopoly for other firms?

A

e.g. Supplier or Retailer

Advantages
- Secure Demand –> ensure steady demand
- Consistent Quality of Products –> Firms buying from monopoly depend on consistent quality

Disadvantages
- Exploitation –> can ↑P for buyers as no competition e.g. Computer output have to buy Apple
- Over-dependence –> Success of other firms depend on monopoly

39
Q

What is the Prisoners Dilemma ? = Draw game theory diagram

A

related to game theory (the little table for oligopoly)
- Even if collusion is in firms best interest –> lower AC cannot trust each-other, will do whats in there best interest

40
Q

What is Price discrimination + What are the conditions needed?

A
  • When a firm charges more than one price for the same good / service

Conditions
- Market power –> needs to be price maker
- Ability to separate markets –> Firm able to identify + keep submarkets separate
- PED different in dif markets –> Firm able to charge dif prices
- Cost of keeping markets separate less than Profits made from Price discrimination

41
Q

Benefits (2) + Costs (2) of Price discrimination for Consumers?

A

Consumer
Ad
- ↓Price for those in elastic PED market –> ↑Consumer Surplus
- Helps consumers in elastic PED market afford product

Dis
- ↑Price + ↓Consumer Surplus for those in inelastic PED market
- Unequal distribution of income –> Consumers ↑Price, Shareholders ↑Dividends

42
Q

Benefits (three) and Costs (two) of Price Discrimination for Producers?

A

Ad
- ↑Revenue –> ↑Profit
- Enables Dynamic Efficiency
- Enables firm to provide product might otherwise be unable to

Dis
- Costs involved in separating markets ay outweigh profit gained
- Can create bad image of firm

43
Q

What is a natural monopoly?

A
  • Most efficient number of firms is one
    –> minimum efficient scale only reached at ↑Level Output
    –> Continuously falling LRAC + Marginal cost
    –> due to high barriers to entry
44
Q

What is a Monopsony?

A
  • a Market where there is only one buyer
    e.g. developing apps Apple is a monosponsy as have to be on app store for Iphones ?? (kinda bad example)
45
Q

Benefits (3) and Costs (2) of Monopsony?

A

Ad
- If firm is Monopsony can ↑Profits –> Supplier cannot overcharge
- lower buying costs passed onto consumer –> ↑Price
- Firm that is Monopsony can use profits for dynamic efficiency

Dis
- Supplier forced to make losses + shutdown
- Choice limited –> Monopsony act as barrie to entry

46
Q

What are Sunk costs?

A

Costs that cannot be recovered if a firm closes down e.g. rent

47
Q

What are the Characteristics of a contestable market? (five)

A

Contestability = measure of how easy it is to enter / exit a market
Can tell if a market is Contestable if there are:
- Low Sunk Costs
- Low barriers for entry/exit
- New entries in the market
- Low level of Super-Normal profits –> implies Firms can enter market
- Low / No Concentration Ratio

48
Q

What are the types of Barriers to entry?

A

3 main types
- Artificial / strategic barriers –> deliberately imposed e.g. predatory pricing, Brand loyalty etc.
- Natural / Structural –> due to the nature of the Market / Business e.g. EOS, High start up cost (machinery)
- Legal Barriers –> Imposed by authorities e.g. patents, Licenses etc.

49
Q

What are the Barrier to Exit a market?

A

Sunk costs –> cannot be recovered if a company leaves market
e.g.
- Advertising
- Cost of Closure e.g. redundancy pay
- Specialised Machinery –> not able to transfer to new market / business –> can sell but wouldn’t make back same money

Econ - T3 - Micro (9 decks)

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