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market structures Flashcards

1
Q

spectrum of competition from most to least competitive

A

1) perfect competition
2) monopolistic competition
3) oligopoly
4) monopoly

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2
Q

factors used to distinguish market structures

A

1) barries to entry and exit
2) product differentiation
3) number of firms

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3
Q

what do we assume is the main objective of firms and where does this occur?

A
  • profit maximisation
  • occurs where MC=MR
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4
Q

sales maximisation

A
  • involves selling the maximum output possible before MR starts to decrease
  • revenue maximisation occurs where MR=0
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5
Q

survival

A
  • making enough profit to simply stay afloat
  • may be the objective of new smaller firms
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6
Q

growth

A
  • may occur after buisnesses have established themselves
  • involves increasing output and scale of operations
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7
Q

increasing market share

A
  • when firms seek to maximise their share in the market which they operate in
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8
Q

divorce of ownership and control

A
  • differences in objectives between the owners of the firm (i.e. the shareholders) and who controls the firm (i.e. managers)
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9
Q

the satisficing principle

A
  • suboptimal but satisfactory level of profit
  • may be the aim of firms as producing where MR=MC can be extremely difficult
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10
Q

characteristics of perfect competition

A
  • large number of firms operating in strong competition
  • low/no barriers to entry and exit
  • homogenous goods being produced
  • perfect information
  • firms are price-takers
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11
Q

profit in perfect competition

A
  • firms can make abnormal profit in the short run
  • however this isn’t possible in the long run as firms become attracted to the market from these abnormal profits
  • this increases supply in the market forcing firms to lower prices in order to remain competitive
  • means firms can only make normal profit in the long run
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12
Q

advantages of perfect competition

A
  • firms are productively efficient as they must minimise costs to prevent being undercut by other firms- links to x-efficiency
  • are allocatively efficient- produce the optimal level to satisfy concumer demand- if not they will lose market share to firms who do produce an optimal level
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13
Q

characteristics of monoplistic competition

A
  • large number of firms operating in strong competition
  • slighty differentiated products
  • low barriers to entry and exit
  • firms are price makers
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14
Q

non-price competition in monopolistically competitive markets

A
  • non-price competition= competiting using non-monetary factors as opposed to monetary factors (such as price)
  • examples= location and store opening hours, packaging, delivery and after-sales service
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15
Q

profit in monopolistically competitive markets

A
  • in the short run firms can make abnormal profits
  • this is limited in the long run as firms join the market as a result of this abnormal profit in the short run
  • means that in the long run only normal profit can be made
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16
Q

characteristics of oligopoly

A
  • handful of firms
  • low competition
  • high barriers to entry and exit
  • product differentiation
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17
Q

concentration ratios

A

indicate the total market share held by the largest firms in a particular market

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18
Q

collusion in an oligopoly market

A
  • when firms work together to determine prices and/or output
  • this reduces uncertianty for firms in the market regarding price and output decisions of rivals
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19
Q

a cartel in an oligopoly market

A

a collusive agreement among firms to fix prices and/or output between themselves.

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20
Q

tactic collusion

A

a collusive relationship between firms in an oligopoly without any formal agreement being made.

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21
Q

overt collusion

A

a collusive relationship between firms involving an open agreement.

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22
Q

cooperation in oligopoly

A

when firms legally and voluntarily agree to take mutually beneficial measures without breaking laws- involves open and honest collaboration

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23
Q

interdependance in oligopoly markets

A
  • firms in an oligopoly market monitor and act upon the behaviour of rival firms
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24
Q

the kinked demand curve model of oligopoly

A
  • if a firm chooses to lower its charging price it will be relatively inelastic as other firms will see this change and then lower their charging price as a result
  • if a firm chooses to raise prices it will be relatively elastic as the quantity demanded will fall for that firm, causing a loss in market share, as rival firms will keep their prices the same so consumers will switch to them
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25
Q

kinked demand curve evaluation

A
  • firms may not seek to maximise profits (weaker argument)
  • ignores the significance of non-price competition
  • some brands have strong brand loyalty so may be able to raise prices without being affected by elasticity
26
Q

advantages of oligopoly

A
  • Firms differentiate their products and engage in non-price competition- builds brand loyalty + provides consumers with better suited options to them
  • Make abnormal profits in the long run
  • With these abnormal profits firms can invest into R&D, education and training, capital, etc
  • Price wars- firms may cut prices which is better for consumers (short run)
27
Q

disadvantages of oligopoly

A
  • Firms can collude and form cartels- make prices higher which negatively effects consumers
  • Not allocatively efficient as they produce where profit is maximised
28
Q

pure monopoly

A

exists when there is a singular supplier of a good or service- which therefore has 100% market share.

29
Q

monopoly power

A

the power of a firm in a market to act as a price maker.

30
Q

price maker

A

a firm with the power to set the ruling market price.

31
Q

characteristics of monopoly markets

A
  • little or no competition
  • high barriers to entry and exit
32
Q

profit maximisation in a monopoly market

A
  • firms can raise prices and restrict output in order to maximise their profits
  • downward-sloping demand curve, indicates price making ability
  • can make abnorml profit in the long run
33
Q

factors which increase monopoly power

A
  • barriers to entry- makes it harder for new firms to enter the market
  • little competition- means firms can increase their monopoly power
  • advertising- helps the firm promote the brand and build brand loyalty
  • product differentiation- means firms can make their product unique from others
34
Q

barriers to entry

A

any feature of a market that makes it difficult or impossible for new firms to enter.

35
Q

natural barriers to entry

A
  • develop naturally within the market

1) economies of scale
2) high R&D costs
3) high start up costs

36
Q

strategic barriers to entry

A
  • are deliberately put in place by firms in the market

1) patents
2) product differentiation
3) brand loyalty
4) limit pricing
5) predatory pricing

37
Q

limit pricing

A

occurs when firms sets prices low enough to discourage others from entering the market.

38
Q

predatory pricing

A

occurs when a firm temporarily sells a product below cost in order to drive competitiors out of the market.

39
Q

disadvantages of monopoly

A
  • not productively efficient as firms have no incentive to cut costs
  • not allocatively efficient as firms restrict output to maximise profits- i.e. not satisfying consumer preferences
  • x-inefficient
  • diseconomies of scale may start to occur if the firm becomes too large
40
Q

advantages of monopoly

A
  • range of possible economies of scale
  • ability to fund investment, R&D and innovation
41
Q

natural monopoly

A

a market where a single firm can benefit from continuous economies of scale

  • these industries have very high fixed costs for infrastructure e.g. TFL, Thames Water
  • in a natural monopoly, LRAC falls continuously over a large range of output due to strong economies of scale
  • more efficient than if multiple firms were in the market
42
Q

price discrimination

A

where firms with monopoly power charge different consumers different prices for the same product.

43
Q

consumer and producer surplus during price discrimination

A

price discrimination allows firms to hijack consumer surplus and convert it into a producer surplus.

44
Q

conditions necessary for price discrimination

A
  • must be able to seperate consumers into different groups- with different elasticities of demand
  • firms must have price-making power- i.e. some degree of monopoly power
  • no “seepage” between markets- i.e. consumers being charged the higher price must not be able to access the cheaper prices
45
Q

advantages of price discrimination

A
  • supernormal profits may be re-invested to create better quality goods and services for consumers
  • the price discriminator may only use the inelastic market so is simply subsidising those paying a lower price
  • those on lower incomes may now be able to access services they were unable to before
46
Q

disadvantages of price discrimination

A
  • increases producer surplus at the expense of consumer surplus
  • may be seen as exploiting consumers who have no other choice than to use the service
  • may not be allocatively efficient if the price is greater than MC
47
Q

consumer surplus

A

the difference between what a consumer would be prepared to pay and the price they actually pay for a good or service.
surplus or satisfaction that consumers enjoy.

48
Q

producer surplus

A

the difference between what a firm would be willing to accept for a good or service and what they actually recieve.
surplus value enjoyed by producers.

49
Q

price competition

A

reducing the price of a good or service in order to make it more attractive than those of competitors.

50
Q

dynamic efficiency

A

improvement in productive efficiency over a period of time.

51
Q

price war

A

where firms repeatedly cut prices below those of competitors in order to win market share.
however, this tends to reduce firms profit so is only used as a last resort.

52
Q

creative destruction

A

means that firms use innovation to overcome existing barriers to entry in a monopoly.

53
Q

contestable markets

A
  • a market with freedom of entry and exit
  • existing firms in the market face a high threat of competition from new firms entering the market
  • incumbent firms have no advantage over new firms entering the market
  • firms produce where price=MC
54
Q

sunk costs

A

costs that can’t be recovered if a firm is unsuccessful in a market and has to exit.

55
Q

hit and run competition

A

in contestable markets, where new entrants take a share of supernormal profits and then exit the industry when these profits have been exahusted.

56
Q

advantages of contestable markets

A
  • threat of potential competition means that consumers may pay lower prices and recieve better customer service
  • firms have an incentive to reduce costs and satisfy consumer preferences
57
Q

static efficiency

A

consists of productive and allocative efficiency and is achieved at a particular point in time using existing resources.

58
Q

productive efficiency

A

is acheieved when average total costs are minimised.

59
Q

allocative effciency

A

is achieved when price=marginal cost.

60
Q

x-inefficiency

A

occurs when a firms actual LRAC is higher than its potential LRAC.

market structures (1 decks)

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