market structures Flashcards
Define perfect competition
market structure with perfect competition, so is highly competitive
What are the characteristics of perfect competition
firms are profit maximisers
- firms are price takers
- homogenous goods
- high degree of competition
perfect information
- low barriers to entry and exit
If consumers have perfect information, what would they know
Know about prices and quality
If producers have perfect information, what would they know?
the best prices, the cost, the best technology
Explain why in the LR in perfectly competitive markets, firms make normal profit from supernormal profit in SR
- fringe firms are attracted to the market due to high SNP in SR
- as barriers to entry and exit are low and knowledge is perfect fringe firms can easily enter the market
- this would increase supply, as goods are homogenous, price of goods would fall until SNP becomes normal profits in LR
Can you draw a diagram with perfect competition SR profit/subprofit alongside normal profit
yes, two different diagrams of supernormal profit and subnormal profit
Explain why in perfectly competitive markets that in the SR subnormal profits turns in normal profit in the LR
- incumbent firms making subnormal profit are profit maximisers and would aim to produce opportunity cost by leaving the market that has low barriers to exit
- as the firm exits, overall supply would fall, in return raises the price of the homogenous good until normal profit is made for firms who stayed
Is perfectly competitive market statically efficient and why/why not
yes
due to high degree of competition, if not allocatively. productively and X efficient they would not survive the market
What is allocative efficiency
output is at p=mc
This means resources perfectly follow consumers demand
- as a result, prices are low, consumer surplus is high, quality of goods are high, choices are high and quantity of goods are high
what is productive efficiency?
producing at lowest point of AC
- means the full exploitation of EOS
low cost of production may be passed onto consumers
is perfectly competitive market X efficient or inefficient
x-efficient
Why in perfectly competitive markets are firms not dynamically efficiency
Due to lack of profit in long run to innovate
- due to perfect information that competitors would steal their technology and ideas
Define monopolistic competition
Mixture of perfect competition and monopolies
Characterised by: low barriers to entry and exit, good information, slightly differentiated goods, high degree of competition, firms are profit maximisers, non-price competition
Why in monopolistic market structure is monopoly exploitation limited?
- due to only having slight differentiation they can set prices only a bit
- due to high degree of competition and substitution for their product in the market
Examples of monopolistic competition?
hair dressers, restaurants, night clubs
Why do monopolistic markets make normal profit in LR
due to low barriers to entry and exit and good information, fringe firms and incumbent firms may enter and leave according to the profits made or loss in SR position
In the long run what is the efficiency of monopolistic market?
AE - inefficient
PE - inefficient
DE - inefficient
Why do we evaluate the efficiency of the long run position rather than the short run?
as the market is more stable in the long run
How can you evaluate that monopolistic competitive markets can be dynamically efficient in LR
if they have enough profits from SR to reinvest
In theory monopolistic competition is AE inefficient, how can this be evaluated?
Consumers prefer differentiated goods, they’re willing to pay higher for this
Why may P.E being inefficient in monopolistic competition be better than perfect competition being efficient
There is more EOS to exploit in monopolistic competition than perfect competition so AC can be driven down lower.
Why may dynamic efficiency be difficult for monopolistic competition in the LR
due to the variety of differentiated goods offered, this is harder to exploit
list 3 pros of a competitive market
- allocatively efficient
- productively efficient
- job creation (fall in poverty and inequality)
list 4 cons of perfectly competitive markets
- lack of dynamic efficiency (due to low barriers to entry and exit)
- less EOS potential to exploit (many small sized firms)
- cost cutting in dangerous areas
- creative destruction
why may a competitive market lead to a lack of dynamic efficiency in the LR?
- competitive markets mean low barriers to entry and exit and good information.
- therefore normal profit is made in the long run
- so technology and quality would lag behind
Why may concentrated markets be better than competitive market for consumers
Can provide lower cost to consumers as there is more potential EOS to exploit
why may cost cutting be a con in competitive markets
they may reduce cost by exploiting labour or reducing the safety of the environment
How can creative destruction occur in competitive markets
- new fringe firms entering bring creative, innovative ideas and lower cost
- destruction occurs to incumbent firms who cannot compete and must shred workers
EV - in competitive markets how can creative destruction be reversed
if employees who lost their jobs join fringe firms
Ev - how can competitive market firms be dynamically efficient
Reinvesting SNP from SR for small investments
When might less competition be better
when there is a natural monopoly
Ev - How can reduction in cost in wrong areas be reduced?
upscaling the role of regulation
Ev - depending the on the good or service what should society consider to maximise their utility
If the firm should be dynamic or allocatively efficient
What is the con of allocatively efficient
a lack of SNP to reinvest and be dynamically efficient in the future
Define a natural monopoly
- market structure with a single dominant seller
- huge fixed cost and cost for start up
- huge amounts of EOS to exploit, may not be able to fully exploit
- efficient when their is no competition
How does natural monopolies minimise their average cost despite having high total cost (because of infrastructure)
having a high amount of output
What is rational for natural monopolies
to have 1 supplier in the market so it is undesirable for there to be competition
Why is competition undesirable for natural monopolies
leads to wasteful duplication of resources as new firms cannot compete with the first firm that has high EOS, leading to a waste of resources when they’re priced out
What inefficiency does competition lead to
Productive and allocative inefficiency
What condition is needed for natural monopolies to be productive and allocatively efficient
regulation
What would natural monopolies price their good at
profit maximisation
How does regulation low natural monopolies price and increasing output
setting output at allocative efficient, and giving subsidies for losses so natural monopolies make normal profit
Why despite being a legal monopoly would Tesco have incentive to lower cost and be efficient
due to the threat of competition
list 4 pros of a monopoly
- Dynamic efficiency
- Greater EOS then competitive market, pass on to prices?
- natural monopoly if regulated
- can cross subsidise merit goods
list 4 cons of monopoly
- not A.E (deadweight welfare loss, fall in consumer surplus)
- not P.E (DEOS)
- X inefficient (lack of competitive drive)
- increase poverty and inequality
list 8 evs for monopolies
- may not be D.E (retain profit or higher dividends)
- EOS and DEOS depends on size
- different objectives
- levels of regulation
- price discrimination
- threat of competition
- natural monopoly
- type of good or service
