Market Structures (perfect and monpolistic competition)- Advantages, Disadvantages, Efficiency

Question 1

What are the four measures of economic efficiency?

Answer 1

1) Productive efficiency
2) Allocative efficiency
3) Dynamic efficiency
4) Pareto Efficiency

Question 2

Explain productive efficiency

Answer 2

Where a business is producing goods as cheaply as possible, if they’re doing this they’ll be producing up to Q where MC crosses the ATC curve

Question 3

What is allocative efficiency?

Answer 3

This is where a business is selling all of it’s units of output for the same price as it costs to produce them, so they’re all sold where MR=MC. This can only occur where the business is in perfect competition, is a price taker and so faces a perfectly elastic demand curve.

Question 4

What is dynamic efficiency?

Answer 4

Where businesses are improving their products and productive efficiency over a period of time. This is normally featured in businesses that are large and so spend a lot of money on R&D in order to attract more customers with better products.

Question 5

What is pareto efficiency?

Answer 5

Affects economy as a whole and occurs when it’s impossible to make somebody better off without making somebody else worse off. Meaning it happens when the economy is on Its PPF

Question 6

What is horizontal integration? Give an example and state the motives of doing this.

Answer 6

Where a business joins with another business in the same industry at the same stage of production E.g- Walmart and ASDA Motives are usually to: - Benefit from greater economies of scale - Increase market share and power, less competition

Question 7

What is verticle integration? Give an example and state the motives of doing this.

Answer 7

Two firms in the same industry but different stage of production joining. E.g: If Ford were to take over an engine supplier or a showroom/dealership The Motive for doing this isusually to increase control over the industry.

Question 8

What does it mean to move backwards or forwards during integration?

Answer 8

To integrate forwards is to move closer to the customer, E.G Ford buying integrating with a group of car dealerships. To integrate backwards is to move further away from the customer, E.G Ford buying a supplier for their parts.

Question 9

Define conglomerate integration

Answer 9

Businesses taking over another business in a different industry. E.g.- Virgin specialise in transport but they went into media.

Question 10

Why would a business choose conglomerate integration?

Answer 10

• Spreads risk
• Very quick expansion

Question 11

Name some advantages and disadvantages of organic growth

Answer 11

Advantages:

• Organic tends to be cheaper
• Low risk
• Less likely to suffer from diseconemies of scale.

Disadvantages:

• Slower can be bad if competitors are growing quicker.

Question 12

Advantages and disadvantages of external growth

Answer 12

Advantages:

• Quicker
• Benefit from more economies of scale than organic growth
• Can reduce competition
• Rationalisation(where you bring different parts of the businesses together so that you aren’t running two identical departments.

Disadvantage:

• Risk suffering from diseconomies of scale to an extent
• May be higher cost than organic growth

Question 13

What does perfect competition show?

Answer 13

It shows what a market would look like if competition was at its maximum. Which is why it doesn’t exist in practise.

Question 14

Explain the 5 assumptions that are made when analysing perfect competition?

Answer 14

1) Lots of small businesses in the market so none have any control
2) Each firm produces an identical product so therefore the only thing consumers are interested in is the price
3) All firms profit maximise (MC=MR)
4) NO barriers to entry or exit in the long run
5) Both consumers and businesses have perfect knowledge about what’s going on in that market. ( consumers know every businesses price)

Question 15

Explain the disadvantage of perfect competition that relates to the size of firms

Answer 15

Businesses under perfect competition are under so much competitive pressure that they’ll have to produce goods at the lowest average costs.

This means that all businesses in the market are small and so none can benefit from economies of scale and therefore their costs and prices might end up being higher compared to larger businesses that face much less competition.

Graph explanation:

In the long run they’ll produce Q and their average costs will be C which also represents the minimum price they can charge

AC1 shows the costs of a larger business, Q1 shows how much they would produce at their maximum efficiency but that might not happen because they may not face enough competition; so they may produce Q2 where their average costs are C1, still much lower than all of the small businesses in the market.

Question 16

Explain the disadvantage of perfect competition relating to dynamic efficiency

Answer 16

Firms under perfect competition are very unlikely to feature dynamic efficiency for two reasons:

1. They’re only making normal profits so they can’t afford it
2. There’s very little incentive as whatever they do the other firms will immediately copy (due to the assumptions made with perfect competition).

Question 17

Explain the disadvantage of perfect competition relating to every business producing the same product

Answer 17

Consumers have no real choice because every firm is producing the same product.

Question 18

What is monopolistic competition?

Answer 18

A very competitive market but unlike perfect competition each firm produces its own unique product (no longer homogenous). Each firm kind of has a monopoly in its own product.

Question 19

Name the 4 assumptions that are made when using monopolistic competition theory

Answer 19

1. Lots of small firms in the market
2. Each firm is producing a slightly different product
3. Every firm is trying to profit maximise (producing to where MC=MR)
4. No barriers to entry or exit in the long run

Question 20

Name four ways that companies in monopolistic competition can differentiate themselves

Answer 20

1. Different brand/name but difficult as businesses as so small
2. Make it different, Eg different phone processor
3. Advertising (not a huge amount as not much money)
4. Customer service

Question 21

Give some information about the demand curves of businesses in monopolistic competition

Answer 21

• They will all have a unique downward sloping demand curve
• There is no distinction between the market and the firm
• The demand curves will tend to be price elastic because the firms will face too much competition from firms producing very similar products

Question 22

What happens in the short and long run relating to profits in monopolistic competition?

Answer 22

In the short run businesses in monopolistic competition can earn any level of profits

However in the long run if a firm is earning supernormal profits this will attract new businesses, demand will decrease for the (business earning supernormal profits) and so they will have to accept a new price and end up earning normal profits.

Question 23

What are the 3 advantages of monopolistic competition?

Answer 23

1. Consumers get far more choice than perfect competition as each business is producing something slightly different
2. Even though firms under monopolistic competition can’t feature either allocative or productive efficiency, because they face so much competitive pressure their costs and prices should be fairly low
3. Incentive to innovate to get more customers (dynamic efficiency) but they dont have much money to do it as they’re only earning normal profits.

Question 24

What are the 3 disadvantages of monopolistic competiton?

Answer 24

1. Can’t feature either productive or allocative efficiency whereas perfect competiton can
2. Too small to benefit from economies of scale
3. Under Monnopolisitc competiton firms have an incentive to spend money on marketing/advertising, this will increase costs and because of that consumers may have to pay higher prices. But if that advertising meant they ended up with a lot more customers they could benefit from economies of scale and their prices could end up being lower, the disadvantage is that this can’t happen in monopolistic competition.