Market Structures and Competitive Behaviour in Leisure Markets Flashcards
What are the two different types of costs of production?
Short run and long run
What is the short run?
The time period when at least one factor of production is fixed in supply (usually capital)
What are fixed costs?
Costs that do not change in the short run with changes in output?
What are variable costs?
Costs that change with changes in output.
What is total cost?
The total cost of producing a given output.
What is average cost?
Total cost divided by output.
What is average fixed cost?
Total fixed cost divided by output.
What is average variable cost?
Total variable cost divided by output.
What can average cost be divided into?
AFC (Average fixed cost) and AVC (Average variable cost)
What is marginal cost?
The change in total cost resulting from changing output by one unit.
What is the long run?
The period of time when it is possible to alter all factors of production.
What is an economy of scale?
A reduction in long-run average costs resulting from an increase in the scale of production.
What is a diseconomy of scale?
An increase in long-run average costs caused by an increase in the scale of production.
What are internal economics of scale?
Economies of scale that occur within the firm as a result of its growth.
Purchasing economies of scale is when…
Firms buy in bulk - to pay less per unit purchased
Selling economies happens when…
A larger firm can make fuller use of sales and distribution facilities than a small one. (Can advertise in a more efficient way)
Technical economies of scale occur when…
Large firms can afford to use expensive, high tech equipment and use it efficiently.
Managerial economies of scale occur as…
… a firm grows in size, it becomes possible and beneficial to employ specialists.
Financial economies of scale happens when…
Large firms usually find it easier to raise finance than small firms. As banks are more willing to lend to large, well-known firms.
Risk-bearing economies of scale occurs as..
…a firm’s output rises, it can produce a greater range of products. Diversifying the product range reduces the chance of experiencing a loss, should one of the products prove to be unpopular.
What are external economies of scale?
Economies of scale that result from the growth of an industry and benefit firms within the industry.
What are internal diseconomies of scale?
Diseconomies of scale experienced by a firm caused by its growth.
What are external diseconomies of scale?
Diseconomies of scale resulting from the growth of the industry, affecting within the industry.
What is average revenue?
Total revenue divided by the output sold.
What is marginal revenue?
The change in total revenue resulting from the sale of one more unit.
What is perfect competition?
A market structure with many buyers and sellers, free entry and exit and an identical product.
What is a price taker?
A firm that has no influence on price.
What is a price maker?
A firm that influences price when it changes its output.
What are barriers to entry?
Obstacles to new firms entering a market.
What are barriers to exit?
Obstacles to firms leaving a market.
What are the three market structures that describe the level of competition that applies to the vast majority of markets?
- Monopoly
- Oligopoly
- Monopolistic competition
Examples of barriers to entry:
- Law
- High start up costs
- Brand names
- Economies of scale
- Limit pricing
What is limit pricing?
Setting a price low to discourage the entry of new firms into the market
How might brand names affect potential entries into the market?
Brand names may have helped to build up brand loyalty with consumers being reluctant to try new brands
How might high start up costs affect potential entries into the market?
Entrants may have difficulty raising the finance and may be concerned about the risks involved.
How might economies of scale affect potential entries into the market?
Economies of scale allow large firms to enjoy low costs of production. This will mean that new entrants operating on a smaller scale will find it hard to compete.
What are three main barriers to exit?
- Sunk costs
- Advertising expenditure
- Contracts
What are sunk costs?
Costs incurred by a firm that it cannot recover should it leave the market.
Why might advertising expenditure affect firms leaving the market?
Spending on large, long-term advertising plan would be wasted should a firm leave the market.
How might contracts affect firms leaving the market?
A firm may be legally obliged to supply a product for a period of time.
What are the key characteristics of a monopoly?
- Significant barriers to entry and exit
- (In pure monopoly) The firm is the industry
- Product is unique
- Firm is a price maker
What is it called when a private sector monopolist want to make as much profit as possible?
Profit maximisation
When are profits maximised?
Where marginal revenue equals marginal cost
What is profit maximisation?
Achieving the highest possible profit where marginal cost equals marginal revenue
When does supernormal profit occur?
When the revenue a firm receives is greater than the cost it incurs.
What is supernormal profit?
Profit earned 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 where long-run average costs are lowest when output is produced by one firm
What are the key characteristics of an oligopoly?
- Few large firms
- High barriers to entry and exit
- Product usually differentiated
- Firms are price makers
- Firms are interdependent
- High level of non-price competition
What does the kinked demand curve show?
Made up of two parts; it suggests oligopolists follow each others price reductions, but not price rises
