Market Structures Flashcards
Costs
the value of inputs
fixed costs
costs that are independent of output produced
variable costs
costs that are directly related to the level of output produced
total cost
The total cost of production of a good or provision of a service.
Total Cost = Fixed Cost + Variable Cost
Average cost
the unit cost of production
Average Cost = Total cost / quantity produced
Marginal cost
The change in total cost when one more unit of output is produced
‘Revenue’ as a vague concept
Receipts from sales
Total Revenue
quantity x price
Price taker
a firm in a competitive market that has to accept the market price
Price maker
a firm that has control over the market price
Average revenue
AR = total revenue / quantity
Marginal Revenue
addition to total revenue from one additional sale
Short run
time period when a firm is unable to change factors of production except for one, usually labour
Long run
Time period when all factor inputs can be changed
Minimum efficient scale
the lowest level of output where long-run average cost (LRAC) is minimised
Economies of scale
The benefits gained through producing on a larger scale
Technical economies
Increased capacity or a technological development that results in lower long-run average costs
Purchasing economies
reduced unit costs due to bulk buying of inputs into a business
Managerial economies
Savings in long run average costs due to the specialisation of management
Financial economies
the cost savings that large firms may receive when borrowing money
Diseconomies of scale
causes of an increase in LRAC beyond the point of minimum efficient scale
External economies of scale
Falling long run average costs that benefit all firms in an industry
Profit satisficing
where a firm makes a reasonable level of profit that satisfies its stakeholders without maximising profit
Sales revenue maximisation
an objective where a firm produces where marginal revenue is zero.
Profit maximisation
the objective of firms that is achieved where Marginal Cost = Marginal Revenue
Sales maximisation
An objective that involves the maximisation of the volume of sales (to the point where average cost = average revenue).
Cross-subsidisation
a business practice where revenue from profitable activities is used to support loss-making ones
Profit
the difference between revenue and costs
Normal profit
The level of profit that keeps a firm in a particular activity
Supernormal profit
profit that is more than normal profit
Market structure
the characteristics of a market
n-firm Concentration ratio
the proportion of the total market shared between the (n)th largest firms
Barrier to entry
obstacle to new firms entering a market
Allocative efficiency
where Price is equal to Marginal Cost
Productive efficiency
- using the least possible scarce resources to produce the maximum output.
- Where LRAC is minimised.
Monopoly
A market characterised by a single firm having complete control over the supply.
Natural monopoly
- Where a monopolist has overwhelming cost advantage
- A market where LRAC are lowest when output is produced by a single firm
Dynamic efficiency
where unit costs are lowered over time
Contestable market
a set of conditions where there is always the threat of new firms being able to enter the market
Contestability
the extent to which the barriers to entry and exit in a market are free and costless
Contestable market
a market in which there are no barriers to entry and exit and the costs facing incumbent and new firms are equal.
Price discrimination
Where a monopolist charges different prices for the same product in different markets
Monopolistic competition
A market structure with many firms producing a differentiated product and where there are few barriers to entry and exit
Product differentiation
where there are minor variations in the types of products on offer
Deadweight loss
loss to society of the firm producing where price exceeds marginal cost
Excess capacity
a consequence of firms producing at above the minimum point on the average cost curve.
Non price competition
Competition between firms on the basis of, for example, branding, consumer service, location, range of products, advertising.
Oligopoly
A market dominated by a few large firms
Interdependent
where the actions of one firm provoke counter action by others
Kinked demand
indicative of price rigidity in oligopoly
Game theory
A means of modelling the behaviour of firms
Collusion
where firms tacitly or otherwise agree to not compete on prices, service provision and other matters that might adversely affect mutual wellbeing
Sunk costs
those costs that cannot be recovered if a firm ceases operation
‘Hit and run’ entry
the way in which a firm enters a market where supernormal profits are being earned and leaves when profits return to normal
Deregulation
removal of regulations
Franchise
the outcome of a competitive system to bid for the provision of services
