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 homogeneous
No barriers to entry or exit
Firms are profit maximisers
In perfect competition what is a market’s demand curve?
Marginal Utility = Demand
In perfect competition what is a market’s supply curve?
Marginal cost = supply
Where is allocative efficiency in a perfectly competitive market?
When MC = MU
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?
The ability to improve productive efficiency over time
What is static efficiency?
When productive and allocative efficiency are achieved at the same time
What’s a barrier to entry?
A difficulty or expense a firm will 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?
High start-up costs
Economies of scale
Network effects
Natural monopolies
Access to essential resources
Brand loyalty
What are some barrier to entry created due to government regulations?
Licensing requirements
Patents and Copyrights
Trade restrictions
Health and Safety standards
Environmental regulations
Minimum capital requirements
What is a monopoly?
A market structure where a single firm dominates the market and is the sole provider of a good or service
What are the drawbacks of monopolies?
Higher prices
Reduced output
Lack of innovation
X-inefficiency
Consumer choice
Inequitable income distribution
Barriers to entry
What is a monopsony?
A market structure where there is a single dominant buyer for a good or service
What are the conditions of monopolistic competition?
Many buyers and sellers
Product differentiation
Low barriers of entry and exit
Some price-making power
Non-price competition
When can supernormal profits be made in a monopoly?
As long as it keeps a dominant market share as there’s no substitutes and can set price at the best level for itself
What is a contestable market?
A market in which there is free entry and exit
What are the characteristics of a contestable market?
Low barriers to entry and exit
Perfect information
No sunk costs
Potential competition
Flexibility in pricing
