Market Structures And Competitive Behaviour In Leisure Markets Flashcards
What are fixed costs?
Costs that do not change in the short run with changes in output
What are variable costs?
Costs that vary with output
Define marginal cost?
Change in total cost resulting from changing output by one unit
Define the long run
The period of time when it is possible to alter all factors of production
What is the minimum efficient scale?
The lowest level of output at which full advantage can be taken of economies of scale
What are internal economies of scale?
Economies of scale that occur within the firm as a result of its growth
Give the 6 types of economies of scale - describe if necessary
Purchasing economies - buying in bulk
Selling economies - making fuller use of sales and distribution facilities
Technical economies of scale - affording to use high tech equipment
Managerial economies of scale - larger firms employing specialists
Financial economies of scale - larger firms finding it cheaper and easier to raise finance
Risk-bearing economies - as output rises, a firm can afford to produce a greater range if products, reducing the impact of falling demand for one product
What are external economies of scale?
Economies of scale that result from the growth of an industry and benefit firms within the industry
Give benefits of external economies of scale
Larger industries allow specialisation and hence productivity
All the firms benefit from good reputation
Improved infrastructure
Define internal diseconomies of scale. Describe why it occurs.
Diseconomies of scale experience by a firm cause by its growth. It occurs due to difficulty in managing a larger company, time taken for decisions to process, worsened industrial relations
Define external diseconomies of scale. Describe why it occurs
Diseconomies of scale resulting from the growth of an industry, affecting firms within the industry. Increased competition and hence price of resources, higher pollution levels
What is a price taker?
A firm that has no influence on price
What is perfect competition?
A market structure with many buyers and sellers, free entry and exit and a homogenous product
What is unit elasticity of demand
When a given percentage change in price equals an equal percentage change in demand, leaving total revenue unchanged
Give influences on revenue
Demand Market power Pricing strategy Market structure Income Prices of related products Weather and special events
Give 3 main market structures
Monopoly
Oligopoly
Monopolistic competition
What is limit pricing?
Setting a price low to discourage the entry of new firms into the market
Give typical barriers to entry
Brand names
High start up costs
Limit pricing
Economies of scale
What are the 3 main barriers to exit?
Sunk costs
Advertising expenditure
Contracts
Give characteristics of a monopoly
High barriers to entry and exit, supernormal profits, profit maximisation, unique product
At what diagrammatical point are profits maximised?
Where marginal revenue equals marginal cost
What are supernormal profits?
Profits where average revenue exceeds average cost
What is normal profit?
The level of profit needed to keep a firm in the market in the long run
What is a natural monopoly?
A market whereby long run average costs are lowest when output is produced by one firm
Define oligopoly
A market structure dominated by a few large firms
Give characteristics of an oligopoly
High barriers to entry and exit, supernormal profit, differentiated product, interdependent firms, high non-price competition
What diagram shows the problems of price cutting?
Kinked demand curve
Give forms of non-price competition
Large scale advertising, competitions, free gifts and brand names
Describe how the kinked demand curve shows dangers of price cutting
Above price of P, demand is elastic, as firms will not follow any price increases, and so any firms that do will lose sales.
Below P, demand is relatively inelastic, as any price cuts will simply be followed and not lead to any more sales
(P is at the kink)
Give a controversial way that firms may reduce the risks of a price war
Forming a cartel
What is a cartel?
A group of firms that produce separately but sell at an agreed price
What is tacit collusion?
Price leadership
What is game theory
A theory of how decision makers are influenced by the actions and reactions of others
What is monopolistic competition?
A market structure in which there is a large number of small firms selling a similar product
What are the characteristics of monopolistic competition?
Large number of small firms, easy entry and exit, product differentiation, non price competition, normal profit
Describe how supernormal profits can occur in the short run, yet only normal in the long run of monopolistic competition
Any supernormal profits being made result in more firms being attracted to the market, increasing supply and lowering price back down to the normal level
Give ways in which monopolistically competitive firms look to increase consumer loyalty
By making their products as distinctive as possible, through small scale advertising, after sales service, better location of outlets and improved quality
In what ways are monopolists inefficient?
AC is not minimised, firms may fail to provide quality of goods desired by consumers, dynamic efficiency may not occur due to lack of incentives. All attributing to X inefficiency, as a lack of competitive pressure and organisational slack
How may monopolists and oligopolistic be efficient?
Through economies of scale, and they can use their supernormal profits to innovate. Firms outside the market will also have to develop superior products to enter the market, in order to overcome the barriers
What is organisational slack?
Where lack of pressure to keep costs low results in managers awarding themselves high pay, taking long lunch breaks etc
Give drawbacks to monopolistic competition
Fails to reach allocative efficiency, restricts production to maximise profit, productively inefficient in how they produce with excess capacity
Give advantages of monopolistic competition
Consumers benefit from the variety of products, and the amount of firms competing spurs innovation and research
What is a contestable markets?
A market in which there are no barriers to entry and exit, and the costs facing both incumbent and new firms are equal
Benefits of contestable markets?
It is both productively and allocatively efficient. The threat of competition ensures efficiency
What is hit and run competition?
Firms quickly entering a market when there are supernormal profits and leaving
What areas does regulation alter?
Barriers to entry and exit, prices charged, product standards etc
Give main aims of firms
Profit satisfying Salves revenue maximisation Profit maximisation Growth maximisation Utility maximisation Provision of merit goods Survival
What are the two main criticisms of the idea of profit maximising
It can be very costly and difficult to calculate marginal cost and so firms may simply use a more simple method to pricing
There is a separation of ownership and control, where managers have other objectives
Why may a firm seek sales revenue maximisation?
Because managers salaries are more often linked to sales growth than profit performance. High sales attract finance and so greater economies of scale may be achieved
What is profit satisficing? What’s the benefit?
Aiming for a satisfactory level of profit rather than the highest level possible. It means varying objectives can be pursued
What is the main conflicting objective to profit maximisation? What is it?
Utility maximisation, the aim of trying to achieve as much satisfaction as possible
Define short run
The time period when at least one factor of production is fixed
