Paper 1 ECO Flashcards
Allocative efficiency
When the value to society from consumption is equal to the marginal cost of production (AR=MC)
Productive efficiency
When a firm is operating at the lowest point on the AC curve so the fewest resources are used + there is a full exploitation of EoS
Dynamic efficiency
Reinvestment of LR supernormal profit
X-inefficiency
When a firm lacks the incentive to control costs. This causes the AC of production to be higher than necessary
Perfect competition
Situation where the level of competition in the market is at a maximum + is a theoretical benchmark to test real markets against
Characteristics of Perfect Comp (HALFPPP)
Homogenous product, All firms have access to FOPs, Large # of buyers and sellers, Free entry into and exit from the market, Price takers, Perfect knowledge, Prof max is assumed key objective
Monopolistic competition
Small firms have many competitors but each one sells a slightly differentiated good/service
Characteristics of Monopolistic Comp
Slightly differentiated products, Low barriers to entry and exit, Some pricing power
Pros + Cons of Perfect Comp
Pros - Max possible consumer surplus therefore consumer welfare, Allocatively and productively efficient
Cons - No scope for EoS, Lack of SNP in the LR means dynamic E is not possible, No consumer choice as products are homogenous
Pros + Cons of Monopolistic Comp
Pros - No significant BtoE so the markets are relatively contestable, Differentiation creates choice
Cons - Generates unnecessary waste
Oligopoly
An imperfect competitive industry where there is a high level of market concentration + a small # of firms dominate the industry
Characteristics of Oligopoly
Market dominated by few large firms, High conc ratio, Each firm sells branded goods, High barriers to entry and exit, Strategic interdependence
Concentration ratio
Combined market share of the top few firms in a market
The higher the market share, the _____ competitive a market is
The higher the market share, the LESS competitive a market is
