Market Structures Flashcards
Name the 4 types of Efficiency?
- 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
Why is Productive Efficiency not common in markets?
- Little incentive for firm to operate at Productive efficiency, and offer lowest price
- P=MinAC
What are the 4 Market Structures
- Perfect Competition
- Monopolistic Competition
- Oligopoly
- Monopoly
What Markets structures are Productively efficient in the SR?
- 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
What Market Structures are Productively Efficient in the LR
LR = All factors of production are variable
- Productively Efficient = MC=AC (P=MinAC) –> Point AC is lowest
- Perfect Competition
What Market Structures are Allocatively Efficient in SR
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
What Market Structures are Allocatively Efficient in LR
LR= All FoP variable
- Allocatively = P=MC (D=S) –> social welfare maximised
- Perfect Competition
List the conditions for Perfect Competition
- Firms are Price takers –> AR=MR
- Goods homogenous
- No barriers to entry or exit
- Firms aim to maximise profits
- Perfect information
- Many small firms
Market structures from most –> least competitive
- Perfect competition
- Monopolistic competition
- Oligopoly
- Monopoly
Assumption made with Market structures (e.g. the goal of the firms)
- All firms are profit maximisers (MR=MC)
In Long Run what happens to profits in Perfect Competition?
- In the Long Run all profits become normal profits
Market Structure definition?
The market environment within which firms operate
When drawing a Normal Profits diagram where is the AC curve?
On the intersect of the (D=AR=MR) and (MC) curves
Draw Super-normal profit diagram for Price takers + Price Makers
Takers
AC curve - below intersect of the (D=AR=MR) and (MC) curves
Makers
im really not sure, sorry
When drawing a Losses diagram where is the AC curve?
Above the intersect of the (D=AR=MR) and (MC) curves
Why, in a perfect market, does supernormal profits turn into Normal profits in the Long-Run
- Super Normal profits attract suppliers, they enter the market easily (due to no barriers to entry)
- S Curve shifts right, Supply ↑ –> P↓ (P1–> P2)
Why, in a perfect market, does losses turn into Normal profits in the Long-Run?
- 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
What is the Main difference between Monopolistic Competition and Perfect Competition?
- Monopolistic has differentiated products giving firms some influence over price making and D/AR curve downwards sloping
What are the Characteristics of Monopolistic competition?
- 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
In Monopolistic Competition what happens when Super-Normal Profits occur?
- 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
What is an Oligopoly? + Key characteristics?
- 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
Concentration ratio Definition?
Proportion of the market supplied by the number / larger firms in industry
What does a high concentration ratio mean?
- 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