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
What is Collusion in Oligopoly?
- When firms collaborate with other firms in market --> e.g. agree to set Price at above Market Price so both enjoy SNP
26
What is a reason for Collusive behaviour?
- Enables firms to ↑Profits --> believe CMA wont realise
27
What are 3 reasons for non-collusive behaviours?
- No trust between firms - Possibility of new entry into market, who can offer product at Lower P - High penalties for being found guilty
28
What are the 2 types of collusion + definition?
- 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
What is a cartel?
- Firms in oligopoly acting as a monopoly through agreement --> form of overt collusion
30
What are the 5 types of Pricing Strategies
- 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
List some types of non-price competition / strategies?
- Advertising / branding - Design - Reliability - Costumer Service --> aim to ↑D
32
Pure Monopoly Vs. Legal Monopoly + Example
Pure - One firm supplying whole market Legal - One firm has 25% or more of market share - Google 90% search engine traffic - Tesco 30%
33
Characteristics of Monopoly Competition?
- 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
What types of efficiency is Monopoly?
- 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
Benefits + Costs of Monopoly Competition for Consumers?
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
Benefits (two) + Costs (two) of Monopoly for Workers?
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
Benefits + Costs of Monopoly for Government?
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
Costs + Benefits of Monopoly for other firms?
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
What is the Prisoners Dilemma ? = Draw game theory diagram
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
What is Price discrimination + What are the conditions needed?
- 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
Benefits (2) + Costs (2) of Price discrimination for Consumers?
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
Benefits (three) and Costs (two) of Price Discrimination for Producers?
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
What is a natural monopoly?
- 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
What is a Monopsony?
- 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
Benefits (3) and Costs (2) of Monopsony?
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
What are Sunk costs?
Costs that cannot be recovered if a firm closes down e.g. rent
47
What are the Characteristics of a contestable market? (five)
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
What are the types of Barriers to entry?
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
What are the Barrier to Exit a market?
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