Market Structures Flashcards
What are the conditions of a perfectly competitive market?
- There is an infinite number of suppliers and consumers
- Consumers & producers have perfect information
- Products are identical (homogeneous)
- No barriers to entry or exit
- Firms are profit maximisers
In perfect competition what is a firm’s demand curve?
A straight horizontal line, where demand = MR and AR
In perfect competition what is a market’s supply curve?
Marginal cost = supply
Where is allocative efficiency in a market?
When MC = AR
What will happen to supernormal profits in the long run, in perfect competition?
They will not be made by any firm
What does it mean if AR < AC?
The firm is making a loss
What happens to a firm if AR > AVC?
They can still continue to trade temporarily
What happens to a firm if AR < AVC?
The firm will leave the market immediately
What is productive efficiency?
When a firm is producing at its maximum output with the lowest possible cost
What is X - efficiency?
A measure of how successful a firms is in keeping its costs down
What assumption is made when markets are achieving productive efficiency?
That there are no economies of scale
What is dynamic efficiency?
Improving efficiency in the long run
What is static efficiency?
When productive and allocative efficiency are achieved at the same time
What is a barrier to entry?
A potential difficulty or expense a firm may have to face to enter a market
What are some things existing firms can do to create barriers to entry?
- Patent new technology needed for the business so other firms can’t copy the design
- Strong branding means existing firms are well known so customers will choose them
What are some barrier to entry created due to the nature of the industry?
- Market may be capital intensive and require a huge amount of capital before any profit can be made
- New firms will have to be producing at a higher point on the average cost curve than other existing firms, meaning they will have to charge higher prices making them look less attractive
What are some barrier to entry created due to government regulations?
- If the production of the product requires a licence
- If there is some planning permissions that need to be approved for factories
What is a monopoly?
A market with only one firm in it
Drawbacks of monopolies?
- There is no need for a monopoly to innovate or respond to changing consumer preferences, so they get complacent
- There is no need to increase efficiency, so X - efficiency can stay low
- Consumer choice is restricted
- Monopsonist power may be used to exploit suppliers
What is a monopsony?
A market with a single buyer
What are the conditions of monopolistic competition?
- Some product differentiation
- Seller has some degree of price making
- Demand is more price elastic
- Either no or low barrier to entry
When can supernormal profits be made in a monopoly?
In the short run
What is a contestable market?
A market that is open to new competitors
What are the characteristics of a contestable market?
- Barrier to entry & exit are low
- Supernormal profits could be made by new firms, but only in the short run.
Where is productive efficiency in a perfectly competitive market?
MC = AC
Where is dynamic efficiency in a perfectly competitive market?
There is no dynamic efficiency, as firms only earn normal profits, so cannot reinvest as much to improve efficiency in the long run
Where is the profit maximising point in a market?
MC = MR
What is an oligopoly?
Where a small number of firms have a high market share in the market
What are the characteristics of oligopolies?
- Market is dominated by a few firms
- Has high barriers to entry
- Differentiated products
- Firms are interdependent
- Competitive or collusive strategies to make interdependence work
What is collusive behaviour?
When firms cooperate with each other, especially over what prices are charged
What is formal collusion?
When there is an agreement between the firms, which is usually illegal
What is informal collusion?
When firms cooperate with each other without any kind of agreement, it just happens as the firms know its in their best interests not to compete
When is competitive behaviour more likely in an oligopoly?
- One firms has lower costs than the others
- There is a relatively large number of big firms in the market
- Homogenous products
- Barriers to entry are low
When is collusive behaviour more likely in an oligopoly?
- The firms have similar costs
- There are relatively few firms in the market
- Brand loyalty
- Barriers to entry are high
What are the outcomes of collusive oligopolies similar to?
A monopoly
What do collusive oligopolies generally lead to?
- Higher price
- Restricted Output
- Allocative and Productive efficiency
- Dynamic Efficiency
What is the risk of collusive oligopolies?
Market failure
What is a hit and run tactic?
Low barriers to entry means that firms can enter the market, make supernormal profits, and then leave
What are the actions of a firms in an oligopoly affected by?
The actions of other firms, they are all interdependent
Why is demand price inelastic at the end of the kinked demand model?
If firms lower their prices, they will gain a little bit of market share until the other firms in the market also lower their prices
Why is demand price elastic at first in the kinked demand model?
If a firm raises its prices then they will most likely see a fall in demand, so price is elastic
What are the two assumptions in a kinked demand curve model?
- If one firm raises its prices, other firms will not follow
- If one firm lowers their prices then the other firms will follow
What does monopolistic competition turn into in the long run?
Perfect competition, as all supernormal profits are competed away so everyone is making normal profits
Why would barriers to entry be high?
- Patents on technology that increase efficiency
- Advertising from existing firms means strong brand loyalty
- Trade restrictions
- Vertically integrated, they have bought out their suppliers
- Sunk costs
How might the behaviour of existing firms be when there is a threat of competition?
They may lower the prices that they set, so that there only normal profits being made, so that new entrants are not attracted to the market and the existing firms can maximise profit in the long run
What is creative destruction?
When the constant innovation in markets result in the destruction of existing markets, and the creation of new markets
What is price discrimination?
When a seller charges different prices to different customers for exactly the same product
What are the conditions for price discrimination to happen?
- Firm must have some price making power
- Firm must be able to distinguish separate groups of customers with different PED’s
What does price discrimination attempt to do?
Turn consumer surplus into additional revenue for the seller
What is first degree price discimination?
When each customer is charged the maximum they are willing to pay
What second degree price discrimination?
When lower prices are charged to those who purchase large quantities
What is third degree price discrimination?
When a firms charges different prices for the same product to different segments of the market
