MICRO 5 - Market Structures Flashcards
1
Q
What is market structure?
A
the number and size of firms within a market for a particular good or service
2
Q
Factors that distuingish market structures:
A
- number of firms in the market
- barriers to entry / exit
- degree of product differentiation
3
Q
Equation for total profit:
A
total profit = total revenue - total costs
4
Q
What is the theory of the firm?
A
it assumes that all firms have the same one objective…to profit maximise
5
Q
What do firms use profit for?
A
- reinvest into the production of new products
- pay out high return to shareholders
6
Q
What is a stakeholder?
A
anyone with an interest in a firm
7
Q
What is a shareholder?
A
anyone who owns shares of the company’s stock
8
Q
What would happen if MR > MC?
A
selling an extra unit will add to profit
9
Q
What would happen if MR < MC?
A
selling an extra unit will lower profit
10
Q
When will revenue be maximised?
A
when MR = 0
11
Q
What are the roles of profit in a market economy?
A
- worker incentives
- sharehold incentives
- resource allocation
- profit as a reward for risk
- profit as a source of finance
12
Q
What is the divorce between ownership and control?
A
the divergence between the objectives of firm owners and the objectives of firm directors
13
Q
What will owners want to do?
A
- profit maximise
- increase share prices
- dividends
14
Q
What will directors want to do?
A
- maximise career aspects
- creature comforts (cars/lunches)
- commissions on sales
- increase one sector of the company
15
Q
What is a moral hazard?
A
when the decision maker will not suffer the negative consequences of their decision
16
Q
What is the satisficing principle?
A
when directors do ‘just’ enough to satisfy stakeholders, rather than the best possible outcome
17
Q
What are other (potential) objectives of a firm?
A
- satisfy customer needs / wants
- growth
- quality of products
- increase the market share
- average low costs
18
Q
What is perfect competition?
A
a competitive market made up of an infinite number of small firms, each too small to influence the market price
19
Q
What are the assumptions of a perfectly competitive market?
A
- infinite number of buyers & sellers
- goods are homogenous
- perfect information
- no barriers to entry
- firms are profit maximisers
20
Q
Example of a (near) perfect competition market:
A
fruit stalls at a farmers market
21
Q
Advantages of a perfectly competitive market:
A
- in the long run, price is lower, so there is allocative efficiency
- as firms produce at the bottom of the AC curve, there is productive efficiency
- supernormal profits in the short run may increase dynamic efficiency
22
Q
Disadvantages of a perfectly competitive market:
A
- in the long run, dynamic efficiency may be limited due to no supernormal profits
- no / few economies of scale
- this model assumption rarely applies in real life
23
Q
What is a monopoly?
A
a single firm has control over the market price for a particular good or service
24
Q
Are monopolies price makers or takers?
A
price makers
25
What does monopoly power allow a firm to do?
earn supernormal profit
26
What is a pure monopoly?
when 1 firm has 100% of the market share
27
What is the monopoly structure?
when 1 dominant firm (80%) has the price and quantity setting power
28
What are the causes of monopolies?
barriers to entry for other firms e.g.
- firm made
- nature of industry
- government made
- economies of scale
- sunk costs
29
What is contestability?
the ease at which a new firm can join an industry (the levels of barriers to entry)
high contestability = low barriers to entry
30
What is 1st mover advantage?
by being the first ti enter a new market, a business gains a commercial advantage over actual & potential rivals leading to increased revenues and profits overtime
31
Example of 1st mover advantage:
Apple : touch-screen technology
32
What are barriers to exit?
costs associated with a decision by a business to leave a market / industry because they are making sub - normal profit
33
Advantages of monopoly power:
- profits used to fund capital investment & research projects
- benefit from huge economies of scale
- tax revenue to the government from increased profits
34
Disadvantages of monopoly power:
- prices are higher in a monopoly than under competition
- higher prices have a regressive effect on low income households
- could get too big, leading to diseconomies of scale
35
What is a monopsony?
a market with a single buyer, they are the price maker
36
What is a natural monopoly?
a market where it is economically efficient for only one firm to supply
37
Policies to control monopoly power:
- industry regulation / deregulation
- windfall taxes
- trade liberalisation
38
Assumptions of monopolistic compeition:
- many small buyers & sellers
- low barriers to entry or exit
- differentiated goods
39
What is monopolistic competition?
a market with a large number of small/medium sized firms, competing by differentiating the good they produce
40
Characteristics of monopolistic competition:
- imperfect competition
- many small buyers & sellers
- low barriers to entry / exit
- differentiated goods
40
How much price power do sellers have and why?
sellers have some price setting power due to advertising and product differences e.g. quality of their goods
41
Examples of monopolistic competition:
- fast food takeaways
- petrol stations
- coffee shops
- hair dressers
- corner grocery shops
42
What does a short run MC diagram look like?
a monopoly diagram
43
Why are firms attracted to join an MC market?
due to the existence of supernormal profit
44
If a new firm enters the market in a long run MC market, what happens to supernormal profit and why?
it decreases due to a decrease in demand
45
Advantages of MC:
- firms are allocatively effieient in both the long run and short run
- the model is more realistic than a PC market
- consumers have more choice
46
Disadvantages of MC:
- in the long run, dynamic efficiency may be limited due to a lack of supernormal profits
- firms are not as efficient as in a PC market
47
What is an oligopoly?
a few number of large firms that are interdependent and may compete, collude or cooperate
48
Characteristics of an oligopoly:
- high barriers to entry / exit
- high concentration ratio
- interdependent
- product differentiation
49
What is a concentration ratio?
measures the combined market share of a leading group of firms in a clearly defined market
50
What is the concentration ratio "rule of thumb" for ologopolies?
an oligopoly exists when the 5 - firm ration exceeds 60%
51
What is collusion?
when two or more firms work together to set price or output levels
52
Why is collusion bad?
- illegal
- leads to lower consumer surplus, increased prices, greater profits for the firms colluding
- oligopolies act like monopolies
- more likely to happen when there are fewer firms
53
What is overt collusion?
formal agreements made between firms
54
What is tacit collusion?
informal (no) agreements made between firms
55
What is cooperation?
when two or more firms cooperate to achieve mutual benefits, it is legal
56
What is a cartel?
a group of two or more firms which have agreed to control prices, limit output, or prevent new entrants of firms into the market
57
Example of a cartel:
OPEC - controlled over 70% of oil supply worldwide
58
What is price leadership?
when one firm changes their prices, another follows / copies them
59
What is a price war?
when firms constantly cut their prices below that of its competitors
60
Example of a price war:
UK supermarket industry
61
What is non-price competiton?
aims to increase brand loyalty, making demand inelastic for consumers
62
Example of non-price competition:
improve customer service, so make more available delivery slots / times
63
Advantages of oligopolies:
- increased profits can be a source of government revenue
- industry standards can improve
- exploit economies of scale, so they have low average costs of production
64
Disadvantages of oligopolies:
- if firms collude, there is a loss of customer welfare
- high prices, profits and inefficiency may result in misallocation of resources
- collusion could reinforce monopoly power / behaviour
65
What is price discrimination?
when firms charge a different price to different groups of people for the same good depending on their price elasticity of demand
66
Conditions for price discrimination:
- the seller must have some price making power (any market but PC)
- the seller must be able to separate customers with different elasticities of demand into different groups
- prevent seepage
- low admin costs
67
What is seepage?
stopping those who paid a low price re-selling to those who would pay a higher price
68
Example of seepage:
pharmaceutical drugs from the USA to Africa. Africa sells them back to the USA to earn a profit
69
What is 1st degree price discrimination?
when each individual customer is charged the maximum price they are willing to pay
70
Advantages of 1st degree price discrimination:
- firms can maximise revenue
- most efficient thing to maximise revenue
71
Disadvantages of 1st degree price discrimination:
- imperfect information = firms don't know how much consumers are willing to pay
- unrealistic in the real world
72
What is 2nd degree price discrimination?
when firms charge different prices based on the quantity purchased by the consumer
73
Example of 2nd degree price discrimination:
Costco
74
What is 3rd degree price discrimination?
when different prices are charged for the same good depending on the consumers elasticity of demand
75
Example of 3rd degree price discrimination:
train fares
76
Advantages of price discrimination:
- some consumers benefit from cheaper prices
- those who pay more are able to subsidise the price for those who aren't able to pay more
- firms can invest their revenue into R&D
- manages demand and avoids congestion
77
Disadvantages of price discrimination:
- higher prices may impact low income households
- decline in consumer surplus / welfare
- not allocatively efficient
- unfair
- administration costs
78
What is contestability?
how open a market is to new competitors, even if currently there is little competition
level of BTE
the ease at which new firms can enter the market
79
Characteristics of contestability:
- actual and potential competition
- low barriers to entry and exit
- number of firms may vary
- supernormal profit can be made
80
Determinants of the level of contestability:
- sunk costs
- levels of advertising and brand loyalty
- access to skilled labour and technology
- vertical intergretion
81
What is vertical intergretion?
if firms do not hold the supply of the good, the government can use legislation to control fair access. It refers to the firms control over stages of the supply chain
82
Example of vertical intergretion?
petrol stations
83
How can the government increase contestability?
- remove legal BTE
- force firms to share their infrastructure
- legislation against predatory pricing
- legislation against abuse of monopoly power
- government may set up their own firm
84
How can firms increase BTE themselves?
- patents
- limiting resource access
- high levels of advertising
- sunk costs
- trade restrictions
85
What are patents?
legal protection of an idea
86
What are hit and run tactics?
If BTE are low, then firms enter as supernormal profits are high, they then leave when prices are driven down
87
Example of hit and run tactics:
Pop-up shops at Xmas
88
What is technological change?
when innovation and/or invention can increase or decrease BTE
89
What is innovation?
improving an existing product
90
What is invention?
making a new product
91
What is the process of creative destruction?
innovation & invention --> destroys existing markets/industries/firms --> job losses (SR) --> new markets created from innovation, invention and investment --> society benefits from new and better goods/services --> jobs are created in new industries
92
What is static efficiency?
the level of efficiency at a given point in time, firms produce at the lowest cost and the goods prices are equal to what the consumer wants to pay
93
What is static efficiency a combination of?
productive & allocative efficiency
94
What is X-inefficiency?
when a firm lacks the incentive to control costs, the average costs of production are to be higher than necessary
95
What is productive efficiency?
producing goods and services with the optimal combination of inputs to produce maximum output for the minimum cost, keeping the low cost and passing it onto the consumer
96
What is allocative efficiency?
when the price of a good is equal to what the consumer wants to pay for it
97
What does price equal when there is allocative efficiency?
price = marginal cost
98
What is dynamic efficiency?
an economys/firms ability to adapt and improve its productivity overtime
99
What is dynamic efficiency opposite to?
static efficiency
100
What is consumer surplus?
the difference between the total amount that a consumer is willing and able to pay for a good or service, compared to the actual amount they do pay
101
What is producer surplus?
the difference between the price at which a producer is willing and able to sell a good or service at, compared to the actual amount they sold it for
