Market structures

Question 1

What are efficiencies?

Answer 1

Concerned with how well resources, like time, materials or talents are used

Question 2

What is static efficiency?

Answer 2

When resources are allocated efficiently at a point of time (short run efficiency)
Different types:
- Productive
- Allocative

Question 3

What is dynamic efficiency?

Answer 3

When resources are allocated efficiently overtime
Via innovation
The more innovation, the more dynamically efficient a firm is

Question 4

What is productive efficiency?

Answer 4

When production is achieved at it’s lowest cost
So produces at bottom of AC curve
Only exists where there is technical efficiency

Occurs when firm operates on PPF curve

Question 5

What is technical efficiency?

Answer 5

When a given level of output is produced with the min number of inputs
Or max output is produced with a given quantity of input

Has to be technical efficiency when productive efficiency is present
- as its the cheapest way to produce

However, not all technically efficient outputs are productively efficient
E.g may be cheaper to produce output with a machines with 2 workers instead of 9 workers

Question 6

What’s allocative efficiency?

Answer 6

(economic efficiency)
Measures whether resources are allocated to those who demand them
When the scarce resources are used t produce a bundle of goods that satisfies the consumer and maximises welfare

Where supply = demand
MC (supply) = AR / P (demand)
P = MC

Question 7

What’s X-inefficiency?

Answer 7

(organisable slack)
Specific type of productive inefficiency
Where a firm fails to minimise it’s avg costs at a given level of output
So they don’t work on the curve AC
They work above it

Question 8

What’s perfect competition?

Answer 8

• Buyers and sellers must be small enough to not influence the price
• Freedom to entry / exit
• Buyers and sellers have perfect knowledge of prices
• All firms produce homogeneous products

AR curve is perfectly elastic
- as a price increase will loose all sellers
so D = AR = MR as a straight horizontal line

Their MC curve is their supply curve
- as they are price takers

In the long run, firms all join as no barriers and removes profits
So theres no profit in long run

Productively efficient
Allocatively efficient
Dynamically inefficient

Question 9

What’s monopolistic competition?

Answer 9

The same as perfect competition, but sells non-homogeneous products instead
Can increase prices without loosing all customers
- so have downwards sloping AR and MR, but demand is elastic
- not a price taker, but have weak market power

Can make abnormal profits in short run
Can’t in long run, as competition makes AC=AR

Allocatively inefficient
Productively inefficicnet
Dynamically inefficient

Question 10

What’s an oligopoly?

Answer 10

• Few large sellers dominate the market
• Barriers to entry/exit are high
• Buyers and sellers have imperfect knowledge of prices and competitors’ actions
• Firms produce non-homogeneous products

Firms are interdependent
- an action from a firm affects others

Firms are price makers and adjust quantity based on strategic interaction with competitors

In the long run, firms can earn abnormal profits due to barriers to entry preventing new competitors from joining

Productively inefficient
Allocatively inefficient
Dynamically efficient

Question 11

What’s collusion?

Answer 11

There’s a very strong incentive for oligopolistic firms to collude
Meaning they make agreements among themselves to restrict competition and maximise benefits

There’s different types of collusion?
- Formal collusion
- Tacit / informal collusion

Question 12

What’s formal collusion?

Answer 12

Where firms make agreements to limit competition
Typically changing prices and output

Different types:
Price agreements
- where they fix prices, maybe low, to ensure other firms can’t compete
Cartel
- more ‘formal’ than formal
- regular meetings, agreements must be met, no cheating

Question 13

What’s overt vs covert collusion?

Answer 13

Overt = formal collusion that’s open for everyone to see
Covert = hidden away from legal authorities

Most collusion today is covert

Question 14

What’s Tacit / informal collusion?

Answer 14

Collusion but no formal agreements about co-operating together
Just monitor each other closely

Could do through price leadership
- where one firm sets a price (often big firm) then smaller firms follow

Question 15

Game theory

Answer 15

Analysis of situations of groups being made interdependent
may not trust each other, but will be benefits if both of them work together.
- but a bigger reward if they betray, but if both betray, they both get bad

Question 16

What’s a playoff matrix?

Answer 16

A table showing the possible ways a matrix will play off

Question 17

What are price wars?

Answer 17

Where several firms repetitively lower their price to outcompete others
To gain/ defend market share
Occur when non-price competition is weak

Prices are increased back to normal after firms leave, due to low supply

Question 18

What is limit pricing?

Answer 18

When a new firm joins to compete so established firm drops price so much it can’t compete

So drops out market, then established firm rises price again

Question 19

What’s a monopoly?

Answer 19

Only one firm in the market
Barriers to entry are too high to enter

Firm is a price maker

Productively inefficient
Allocatively inefficient
Dynamically efficient

Pure monopoly (100% share)
Working monopoly (firm with monopoly powers, >25%)

Pure monopolies are when it just works out more efficient for only one firm to run the market
E.g tap water

Question 20

What’s price discrimination?

Answer 20

Done by monopolists to maximise profits
Charging different prices for the same good for different categories of people

Monopolists only do this when:
- face different demand curves
- able to distinct different groups of people
- must be able to keep markets separate for a low cost

Price discrimination splits up the graphs, but only changing their AR and MC
Don’t have to draw MC and AC for the segmented graphs

Question 21

What’s the 3 degrees of price discrimination?

Answer 21

First degree
- occurs when firm can charge each customer a different price
- the max price that they will pay
Second degree
- charges customer on how much of the product they buy
Third degree (important one)
- splits consumers into different groups, based on characteristics
- e.g times for the train, elderly people get cheap etc

Question 22

What’s a monopsony?

Answer 22

When there’s only one buyer in the market
No competition to buy due to economies of scale etc
Pay lower prices as firms selling have no choice, but supply them less
- not good for consumers
Have higher abnormal profit

Pure monopsony is rare
- but many firms have monopsony powers

Question 23

What’s a bilateral monopoly?

Answer 23

When a monopsony meets a monopoly in the market
So theres only one buyer and one seller
There is greater allocatively efficiency here
Prices, quantity demanded/ supplied are all higher

Question 24

What’s a contestable market?

Answer 24

Assumes there’s freedom to entry/ exit
Any number of firms
Firms compete with no collusion
Perfect knowledge

A contestable market will follow some of these traits, not perfectly
But mainly if entering market is easy = contestable
There’s no perfectly contestable markets

Perfectly competitive and monopolistic competition are contestable due to low barriers of entry

Abnormal profits in short run
Normal profits in long run

Question 25

What’s hit and run competition?

Answer 25

When firms enter markets for high profits, then leave at low profits after driving the price down
Happens in contestable markets

Question 26

What’s consumer sovereignty?

Answer 26

The power of consumers to allocate resources through their spending decisions
The ultimate control of a firm

Question 27

What’s Neo-Keynesian Economics?

Answer 27

Believe firms maximise long run profit rather than short run

Tend to keep prices high and keep them due to ‘stickiness’ of supply and demand
- as they believe it damages their position in the market

Question 28

What are the 4 different types of business objectives?

Answer 28

Profit maximisation
- MC=MR
Revenue maximisation
- top of TR curve
- MR=0
Sales maximisation
- AC=AR

Profit satisfying
- Making only enough, sufficient profit and not maximising anything
- to benefit other peoples needs, like wages, or satisfying shareholders

Question 29

What’s Nash equilibrium?

Answer 29

When they both make not much as they both drop prices
Will make a lot more if the colluded
But they can’t be screwed over