market structures Flashcards
What is the meaning of the shut down point
The point at which is no longer profitable
When a firm’s ATC exceeds the market price of its product
Can perfect competition be allocative and productively efficient?
Can be AE - operates where P=MC
Resources are following consumer demand
Low prices and high consumer surplus
Can be PE - firm operating at lowest point on the AC curve
Full exploitation of EOS
Why firms in perfect competition are unlikely to be dynamically efficient and x INefficient?
No DE - cannot make supernormal profits in LR (new firms attracted, easily enter, supply shifted to right/falls, until there are no incentives left to enter market, left with normal profits)
No brand new, innovative products over time
Cannot be x-inefficient BUT can be x-efficient
Producing on AC curve (minimising waste and costs)
characteristics of monopolistic competition
- slightly differentiated goods
- many buyers and sellers
- demand is price elastic
- firms are price makers
- low barriers to enter
- nonprice competition
- good information
- profit maximisers
why is monopolistic competition a monopoly diagram in the SR
- selling relatively unique goods
- price making ability
- profit maximise
why can firms in monopolistic competition not profit max in the LR
- in LR firms are attracted to supernormal profits = demand for indv firms in market shifts to left as consumers are shared with more firms = until more normal profit made
- lower barriers to entry
- good information
can firms in monopolistic competition be AE PE and DE?
no
- price is greater than MC
no - not operating at lowest point of AC
no
- no LR supernormal profits being made
good evaluation of monopolistic competition
compared to monopoly, price exploitation and loss of consumer surplus due to allocative inefficiency is no where near as bad
productive inefficiency is nowhere near as bad as monopoly (good substitutes - firms can’t afford to forgo economies of scale and charge higher prices like monopolies)
- compared to perfect comp, there are higher EOS so any EOS being exploited might be greater extent = prices are still lower than PC
what is allocative efficiency
MC = AR
- assumption where there are no external costs and benefits and people are paying the exact amount it costs to produce the last unit
where resources follow consumer demands
- where society surplus is maximised
- where net social benefit is maximised
what is productive efficiency
when a firm is operating at the lowest point of the AC curve
- full exploitation of EOS (minimising their costs)
what is X efficiency
firm is minimising their waste (no excess costs)
- production takes place on AC curve
where could X-inefficiency take place
monopolies - lacks competitive drive = complacency and x-inefficiency
public sector firms - objective to maximise social welfare
- LITTLE INCENTIVE to minimise costs - if wages + employment isn’t dependent on revs, workers may not work hard to raise volumes of sales = managerial/ organisational slack
- upwards shift AC
what is DE
reinvestment of LR supernormal profits back into firm in form of capital, R+D
static vs dynamic efficiency
static = productive, allocative, x efficiency (occur at one specific production point)
- DE occurs overtime
benefits of a monopoly to consumers, workers, government
consumers
- innovation (profits used to produce new + better products)
- lower prices (produce at lower AC than other firms)
workers
- better job security (no competition, likely to have steady demands for their goods)
- higher pay/ perks (higher profits)
government
- higher tax rev (large firms pay higher rates of corp taxes, more profit monopoly makes, more it will pay in tax)
- lower unemployment (help to keep jobs within country - may also improve balance of payments)
