Pack 8: Market Structures (Pt 1)

Question 1

What is allocative efficiency?

Answer 1

Market equilibrium is at the price that represents consumer preferences, (price = marginal costs)

Question 2

what is productive efficiency?

Answer 2

Business reaches the lowest point on its AC curve implying an efficient use of scarce resources, (minimum AC).

Question 3

What is X-inefficiency?

Answer 3

When a lack of effective competition in an industry means the costs are higher than in a competitive market.

Question 4

What is dynamic efficiency?

Answer 4

Economic efficiency improving over time, e.g. innovation and R&D

Question 5

What is perfect competition?

Answer 5

Market structure where there is a large number of buyers and sellers who are price takers and sell homogenous product and have low barriers to entry/exit

Question 6

Why would a firm shut down in the long run?

Answer 6

If price is below AC as the business will be making a loss

Question 7

Why would a firm shut down in the long but not the short-run?

Answer 7

If price is below AC but above AVC as they will be making a positive contribution to fixed costs making their loss smaller.

Question 8

What is a pure monopoly?

Answer 8

One firm supplying all output within the market, without facing competition due to high barriers to entry. (100% market share)

Question 9

What is monopoly power?

Answer 9

Firms being able to control the price they charge in the market