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Economics > Market Structures (theme 3 > Flashcards

Market Structures (theme 3 Flashcards

1
Q

What are the 4 characteristics a perfectly competitive market must possess

A
  • Must be many buyers and sellers (price takers)
  • Freedom of entry and exit
  • Buyers and sellers must possess perfect knowledge of prices
  • All firms produce a homogeneous product
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2
Q

Example of a perfectly competitive market

A

Farming

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3
Q

What is meant by price taker

A

A firm which has no control over the market price

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4
Q

What is meant by monopolistic competition

A

A market structure with similar characteristics to perfect competition, but products are not homogeneous

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5
Q

What do firms in a monopolistically competitive market achieve in the short run

A

Abnormal profits

Producing at MC=MR

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6
Q

What do firms in a monopolistically competitive market achieve in the long run

A

Normal profits
Due to the opportunity for abnormal profits in the short run, new firms enter the market, increasing supply and so reducing price

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7
Q

What is meant by a concentrated market

A

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

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8
Q

What are the 2 main characteristics of an oligopoly, and the 2 other ones that are relevant but less so

A
  • Supply in industry is concentrated by a few firms
  • Firms are interdependent
  • Barriers to entry are high
  • Products are differentiated
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9
Q

What is meant by non-collusive or competitive oligopoly

A

When firms in an oligopolistic industry compete amongst themselves and there is no collusion

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10
Q

What is meant by collusion

A

Collective agreements that are formal or tacit between firms, that restrict competition

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11
Q

What is meant by formal collusion

A

Where an agreement is made to restrict competition by reducing output, raising prices or creating barriers to entry

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12
Q

What is meant by a price agreement

A

A type of formal collusion where 2 or more firms arrange to fix prices of their products

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13
Q

What is meant by a cartel

A

A formal agreement between firms to limit competition in the market, typically limiting output to increase prices
Eg oil producing countries

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14
Q

What is meant by tacit or informal collusion

A

When firms collide without any formal agreement having been reached

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15
Q

What is meant by price leadership

A

A type of tacit collusion, where one firm, the price leader, sets its own prices and other firms in the market set their prices in relationship to the price leader

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16
Q

What is meant by a price follower

A

A firm that sets its prices by reference to the prices set by the price leader

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17
Q

What is meant by game theory

A

The analysis of situations in which players are interdependent

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18
Q

Prisoner’s dilemma

A

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 and been able to co-operate and co-ordinate their strategies

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19
Q

What is meant by the payoff matrix

A

In game theory, shows the outcomes of a game for the players given different possible strategies

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20
Q

What is meant by a duopoly

A

An industry where there are only 2 firms

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21
Q

What are the three types of price competition

A

Price wars
Predatory pricing
Limit pricing

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22
Q

What is a price war

A

A situation where several firms in a market repeatedly lower their prices to outcompete other firms
Typically occurs in a market where non-price competition is weak

23
Q

What do price wars achieve in the short term

A

Increase sales due to lower prices

24
Q

What do price wars cause in the long term

A

Have to leave the market as there is a lack of profit, or raise prices

25
Q

What is meant by limit pricing

A

When a firm sets it prices below the estimated average costs of the new firms, so that the new firm can not enter the market and gain supernormal profit

26
Q

What is meant by predatory pricing

A

Lowering prices below your own average costs in the short run, to compete with either current or new competitors, and being prepared to make a loss in this time

27
Q

What are examples of non-price competition

A

Marketing mix

Brands

28
Q

What is the marketing mix made up of

A 
4 P’s
Product
Price
Promotion
Place
29
Q

What are the characteristics of a monopoly

A
  • Only one firm supplying output
  • Barriers to entry prevent others
  • The monopolist is a short run profit maximiser
30
Q

What is meant by a monopolist

A

A firm which controls the output in a market

31
Q

What is meant by monopoly power

A

The ability of a firm to control the price they charge for their product

32
Q

What are examples of the barriers to entry for a monopoly

A

Legal barriers
Sunk costs
Scale economies
Anti-competitive practices

33
Q

What is meant by price discrimination

A

Charging a different price for the same good or service in different sub-markets

34
Q

Examples of price discrimination

A
  • Age
  • On peak/off peak
  • Income
35
Q

What are the 3 conditions that must be present for a monopolist to be able to price discriminate effectively

A
  • The monopolist must face different demand curves from separate groups of buyers
  • The monopolist must be able to split the market into distinct groups of buyers
  • Must be able to keep markets separate (eg income)
36
Q

What are the three types of price discrimination

A

First degree
Second degree
Third degree

37
Q

What is meant by third degree price discrimination

A

As explained previously

38
Q

What is meant by second degree price discrimination

A

When a monopolist charges customers according to how much they buy

39
Q

What is meant by first degree price discrimination

A

When a firm is able to charge each customer a different price

40
Q

At what point does a monopoly set its price

A

MC = MR

Profit maximisation

41
Q

What is meant by a monopsony

A

When there is only one buyer in a market

42
Q

Examples of monopsony’s

A

Network rail
Government
Factory in individual town

43
Q

What is specific about price and output in a monopsony

A

Monopsonists will pay lower prices to suppliers due to power
Suppliers will supply a lower quantity because of this
Monopsonists will therefore sell at a higher price

44
Q

Impact of a monopsony to the monopsonist

A

Gain higher profits due to power

45
Q

Impact of monopsony to suppliers

A

Receive lower revenues

46
Q

Impact of monopsony to customers

A 
Higher prices (depending on elasticity)
Reduced supply
47
Q

Impact of monopsony to employees

A

May receive low wages

However if number of employees is low due to reduced supply, wages may be normal

48
Q

What is meant by a bilateral monopoly

A

When there is only one buyer and one seller in a market

49
Q

What is meant by a contestable market

A

A market where there is freedom of entry to the industry and where costs of exit are low

50
Q

Assumptions of a contestable market

A
  • Freedom to entry and exit
  • Firms compete and don’t collide
  • Firms are short run profit maximisers
  • Firms May produce homogeneous goods or branded goods
  • There is perfect knowledge in the industry
51
Q

What does the theory of contestable markets suggest about profit

A

Abnormal profits can be earned in the short run

Only normal profits can be earned in the long run

52
Q

Evaluation point of a firm in a contestable market being able to achieve abnormal profit in short run

A

Due to opportunity for new firms to enter, they will continuously be using price competition to compete with hit and run competition and so don’t achieve abnormal profit in short run

53
Q

What is meant by hit and run competition

A

When firms enter a market due to high profits and then leave soon when profits fall

54
Q

Example of hit and run competition

A

Clothes shop launching new clothing line for short period of time

Economics (5 decks)

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