Market Structures And Contestability

Question 1

What is dynamic efficiency

Answer 1

occurs when resources are allocated efficiently over time.

Question 1

What is allocative efficiency

Answer 1

occurs when scarce resources are used to produce a bundle of goods that satisfies consumer preferences and maximizes their welfare. P = MC

Question 2

What is productive efficiency

Answer 2

Achieved when production is achieved at the lowest average cost

Question 3

What are market structures

Answer 3

characteristics of a market which determine the behavior of firms within the market

Question 4

What is supply chain

Answer 4

the number of businesses which are involved, at different stages, in the production and distribution of a single good

Question 5

what is X-inefficiency

Answer 5

inefficiency arising because a firm or other productive organization fails to minimize its average costs of production at a given level of output

Question 6

What are barriers to entry

Answer 6

Factors that make it difficult or impossible for firms to enter an industry and compete with existing producers

Question 7

What are barriers to exit

Answer 7

Factors which make it difficult for firms to cease production and leave an industry

Question 8

What is the concentration ratio

Answer 8

The market share of the largest firms in an industry.

Question 9

What is independent and interdependent

Answer 9

Independent is when the actions of one firm will have no significant impact on any other single firm. Whilst interdependent is the opposite.

Question 10

What is market concentration

Answer 10

The degree to which the output of an industry is dominated by its largest producers

Question 11

What is market share

Answer 11

The proportion of sales in a market held by a firm or a group of firms

Question 12

What is product differentiation

Answer 12

aspects of a good or service which serve to distinguish one product from another such as product formulation, packaging, marketing and availability

Question 13

Market concentration ratio equation

Answer 13

(Sales of firm/total sales in the industry) x 100%

Question 14

What is perfectly competitive market structure

Answer 14

Many small buyers and sellers, with freedom of entry and exit from the industry. Both parties with perfect knowledge; producing a homogeneous product.

Question 14

What are the features of monopolistic competition

Answer 14

There are a large number of buyers and sellers in the market, small and independent. No barriers to entry to exit. Firms are profit maximizers. But firms produce differentiated or non-homogeneous goods.

Question 14

What is product differentiation

Answer 14

The way firms convince customers that their products are different to competitors’ products

Question 15

What are a few ways firms can differentiate a product

Answer 15

Physical differentiation
Marketing differentiation
Distribution differentiation

Question 16

How does a firm behave in the short run in terms of profit

Answer 16

Firms can make supernormal profit in the short run.

Question 17

How does a firm behave in the long-run in terms of profit

Answer 17

Firms make normal profit in the long run

Question 18

How does productive, allocative efficiency look like for monopolistic firms

Answer 18

Monopolistic firms in the long run are not productively and allocatively efficient

Question 19

What are concentrated markets

Answer 19

a market where most of the output is produced by a few firms and where therefore the concentration ratio is high

Question 20

What is an oligopoly

Answer 20

a market structure where there is a small number of firms in the industry and where firms are interdependent with one another, creating uncertainty; barriers of entry are likely to exist.

Question 21

What is market conduct

Answer 21

the behavior of firms, such as pricing policies, promotion of products, branding and collusion with other firms

Question 22

What are the assumptions of an oligopolistic market

Answer 22

Supply is concentrated in the hands of relatively few firms. Firms must be an interdependent. Markets have high barriers to entry, selling slightly differentiated products.

Question 23

What is game theory

Answer 23

the analysis of situations in which players are interdependent

Question 24

What is collusion

Answer 24

collective agreements, either formal or tacit, between firms that restrict competition

Question 25

What is a cartel

Answer 25

a group of firms that have make a formal agreement to limit competition in the market, for example by limiting output in order to raise prices

Question 26

What is price leadership

Answer 26

when one firm. the price leader, sets its own prices and other firms in the market set their prices in the relationship to the price leader

Question 27

What is a price war

Answer 27

a situation where several firms in a a market repeatedly lower their prices to outcompete other firms; the objective may be to gain or defend market share.

Question 28

What is collusive oligopoly

Answer 28

a market with a high concentration ratio where a few interdependent firms cooperate, either formally or tacitly, to restrict competition

Question 29

What is a price agreement

Answer 29

a type of formal collusion where two or more firms arrange to fix prices of their products

Question 30

What is tacit collusion

Answer 30

where firms collude without formal agreement and no explicit communication.

Question 31

What is a price follower

Answer 31

a firm which sets its price by reference to the prices set by the price leader in the market

Question 32

What is the prisoners dilemma

Answer 32

a game where, given that neither player knows the strategy of the other player, the optimum strategy for each player leads to a worse situation than if they had known the strategy of the other player.

Question 33

What is a monopoly

Answer 33

market structure where one firm supplies all output in the market without facing competition because of high barriers to entry in the market

Question 34

What is a monopsony

Answer 34

exists when there is only buyer in the market

Question 35

What is monopoly power

Answer 35

Ability to control the price they charge for their product in a market

Question 36

What is a natural monopoly

Answer 36

a monopoly that arises due to continuing falling economies of scale

Question 37

What is a price discrimination

Answer 37

charging a different price for the same good or service in different markets

Question 38

How does the efficiency act in monopolistic firms

Answer 38

neither productively or allocatively efficient

Question 39

What is the assumption of a monopsony

Answer 39

There is a dominant buyer in the market

Question 40

what is the theory of contestable markets

Answer 40

a market where there is freedom of entry to the industry and where costs of exits are low

Question 41

characteristics of contestable markets

Answer 41

Number of firms may vary
freedom of entry and exit (no sunk costs)
firms are short run profit maximizers
may produce homogeneous goods/branded goods
There is perfect knowledge
potential for hit-and-run competition

Question 42

What is hit and run competition

Answer 42

when firms can enter a market at low cost attracted by high profits and then leave the market at low cost when profits fall.

Question 43

How does profit behave in contestable markets

Answer 43

supernormal profits can be earned in the short run

normal profit in the long run