Market Structures Flashcards
What is allocative efficiency?
Resources distributed to goods consumers want, maximising utility. P=MC
What is productive efficiency?
Firms produce at lowest point on the average cost curve. (Where MC=AC)
What is dynamic efficiency?
Where all resources are allocated efficiently over time and rate of innovation is optimum.
What is x-inefficiency?
Producing outside of the AC boundary.
What are the characteristics of perfect competition?
- Many buyers and sellers
- Freedom of entry and exit
- SR = profit maximisers
- Perfect knowledge
- homogenous products
- price takers
What are the advantages of perfect competition?
- Allocative efficiency
- Productive efficiency
- SR = Dynamic efficiency
What are the disadvantages of perfect competition?
- LR = no dynamic efficiency
- Not a realistic model
What are the characteristics of monopolistic competition?
- No barriers of entry or exit
- Many buyers and sellers
- Non-homogenous products
- imperfect knowledge
- price makers
- imperfect competition
What are the advantages of monopolistic competition?
- Allocative inefficiency
- Realistic model
- Productive inefficiency
- SR = Dynamic efficiency
What are the disadvantages of monopolistic competition?
- LR = No dynamic efficacy
- X-inefficiency
What are the characteristics of an oligopoly?
- High barriers of entry and exit
- high concentration ratio
- interdependence of firms
- product differentiation
Why might firms collude in an oligopoly?
- Spend less on research and development
- economies of scale
- increase standards
- increase investment
Why might firms not collude in an oligopoly?
- loss of allocative efficiency
- high average production costs
- increased monopoly power
- loss of consumer surplus
What types of collusion are there in an oligopoly?
- Overt ; formal agreement
- Tacit ; implied
What is a cartel?
Businesses controlling the price along with output in order to maximise profits.
What is a price leader?
A firm that changes the price, resulting in others following.
What are the types of price competition in an oligopoly?
- Price wars
- predatory pricing
- limit pricing
What are the types of non-price competition in an oligopoly?
- special offers
- adverts
- branding
- loyalty
What are the characteristics of monopolies?
- price maker
- price discrimination
- sole seller or 25% market share
- high barrier of entry and exit
- abnormal profits in the short and long run
What is third degree price discrimination?
To charge different groups of consumers different prices for the same good
What are the benefits and disadvantages of third degree price discrimination for consumers?
Advantages:
- cross subsidises = lower prices
- positive externality
Disadvantages:
- Loss of consumer surplus = allocative inefficiency
- Higher price in long run = monopoly power
What are the benefits and disadvantages of third degree price discrimination for producers?
Advantages: - Better use of spare capacity - abnormal profits - ability to cross subsidies Disadvantages: - costly to divide market = limits benefits - CMA involvement
What are the advantages of monopolies to firms, consumers, employees and suppliers?
- Increased government revenue
- decreased average cost of production
- export revenue
- more efficient (natural monopoly)
- high innovation = high barriers of entry
- dynamic efficiency in the long run
What are the disadvantages of monopolies to firms, consumers, employees and suppliers?
- No choice
- Misallocation and inefficiency
- Exploits consumers due to less allocative efficiency
- keeps production costs high
- loss of consumer surplus
What are the characteristics of a monopsony?
- Sole buyer
- supplier power
- price maker
- profit maximiser
What are the advantages and disadvantages of monopsonies?
Advantages: - lower prices - monopsony saves money Disadvantages: - suppliers get normal profits and have unproductive workers due to low wages.
What are the characteristics of contestable markets?
- No sunk costs
- access to technology
- low consumer loyalty
What are the implications of contestable markets for the behaviour of firms?
- allocative and productively efficient
- takes abnormal profits and leaves
What is contestability?
The ease at which new firms can enter and leave a market
What are sunk costs?
Costs that can’t be recovered once spent
