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A2 Economics > Part 2 - Market Structure And Competitve Behaviour In Leisure Markets > Flashcards

Part 2 - Market Structure And Competitve Behaviour In Leisure Markets Flashcards

0
Q

Define fixed costs

A

Costs that do not change in the short run, even with changes in output

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1
Q

Define short run

A

The time period when at least one factor of production, typically capital, is fixed

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2
Q

What are variable costs?

A

Costs that change with changes in output

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3
Q

What is average fixed/variable cost?

A

Total fixed/variable cost divided by output

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4
Q

What is marginal cost?

A

The change in total cost resulting from changing output by one unit

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5
Q

What is meant by the term ‘long run’

A

The period of time when it is possible to alter all factors of production

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6
Q

Define economies of scale

A

Reduction in long run average costs resulting from an increase in scale of production

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7
Q

Define diseconomies of scale

A

An increase in the long run average costs caused by an increase in the scale of production

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8
Q

What is minimum efficient scale?

A

The lowest level of output at which economies can take full advantage of economies of scale, so the long run average costs are at a minimum

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9
Q

What are constant returns to scale?

A

Long run average costs remaining unchanged even when the scale of production increases

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10
Q

What are internal economies of scale?

A

Economies of scale that occur within the firm as a result of its growth

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11
Q

What are purchasing economies of scale?

A

Bulk buying to reduce the average cost

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12
Q

What are selling economies?

A

Larger firms making better use of selling and distribution facilities than smaller companies, for example transporting twice as many goods won’t cost twice as much

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13
Q

What are technical economies of scale?

A

Large firms can afford to use expensive, high tech equipment, and use it to maximal efficiency

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14
Q

What are managerial economies of scale?

A

Larger firms employing more workers to do specialist tasks, who in turn become experts at these tasks, increasing overall efficiency

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15
Q

What are financial economies of scale?

A

Larger firms finding it cheaper and easier to raise finance than smaller firms

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16
Q

What are risk bearing economies?

A

Larger firms being able to produce a greater range of products, and hence making the business more stable, should one of these products prove to be unpopular

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17
Q

What are external economies of scale?

A

Economies of scale that result from the growth of an industry and hence benefit the firms in the industry

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18
Q

What are internal diseconomies of scale?

A

Diseconomies of scale experienced by a firm caused by its growth

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19
Q

Why may internal diseconomies of scale occur?

A

The larger a firm is, the more difficult it is to control - inefficiencies go unnoticed. Also the tiers of management increase, and hence co-ordination is slowed

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20
Q

What are external diseconomies of scale?

A

Diseconomies of scale resulting from the growth of the industry, affecting firms within the industry

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21
Q

What is average revenue?

A

Total revenue divided by output sold.

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22
Q

What is marginal revenue?

A

The change in total revenue resulting from the sale of one more unit

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23
Q

What is a ‘price taker’

A

A firm whose output and sales do not affect price

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24
Q

Define perfect competition

A

A market structure with many buyers and sellers, free entry and exit and an identical product.

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25
Q

In what market structure do price takers operate in?

A

Perfect competition, as their price doesn’t change even when they sell more

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26
Q

What is a price maker?

A

A firm that influence price when it changes it’s output

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27
Q

What is unit elasticity of demand and when does it occur on an AR curve?

A

When a given percentage change in price causes an equal percentage change in demand, leaving total revenue unchanged. It occurs when MR is zero

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28
Q

List 3 things that may influence a firms revenue

A

Changes in demand for the product
Changes in income
Changes in prices of related products
Weather and special events

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29
Q

What is predatory pricing?

A

Setting the price low with the aim of forcing rivals out the market

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30
Q

What is a superior good?

A

A good with positive income elasticity of demand, greater than one.

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31
Q

What are the 3 main market structures that describe the level of competition that applies in the vast majority of markets?

A

Monopoly
Oligopoly
Monopolistic competition

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32
Q

What indicates the market structure in which a firm operates?

A

Market concentration ratio
Whether there are barriers to entry and exit
Type of profits earned in long run
Behaviour and performance of firms

33
Q

What is a barrier to entry?

A

Obstacles to new firms entering the market

34
Q

Give examples of barriers to entry

A

High start up costs
Big Brand names
Economies of scale
Limit pricing

35
Q

Describe limit pricing

A

Setting a price low to discourage the entry of new firms into the market

36
Q

Why may high start up costs discourage potential market entrants?

A

They may find it difficult to raise the finance, and may be concerned about the risks. Borrowing money would also be more expensive, going off financial economies of scale

37
Q

Why may brand names discourage potential market entrants?

A

Brand names build up brand loyalty, meaning customers are reluctant to try new brands

38
Q

How does limit pricing discourage potential market entrants and why does it occur?

A

Larger firms benefit from economies of scale, and hence have lower average costs of production. A smaller firm wouldn’t have these monopolies of scale and hence would find it very difficult to compete

39
Q

What are the three barriers to exit?

A

Sunk costs
Advertising expenditure
Contracts

40
Q

What is the main goal of a private sector monopolist?

A

Profit maximisation

41
Q

On a marginal costs and revenue diagram, where are profits maximised?

A

Where MC=MR

42
Q

Define profit maximisation

A

Achieving the highest possible profit where marginal costs equals marginal revenue

43
Q

What is supernormal profit

A

Profit earned where average revenue exceeds average costs

44
Q

Define normal profit

A

The level of profit needed to keep a firm in the market in the long run

45
Q

What is a natural monopoly?

A

A market where long run average costs are lowest when output is produced by one firm

46
Q

What is a legal monopoly?

A

A market where a firm has a share of over 25%

47
Q

What is a dominant monopoly?

A

A market where a firm has a 40 percent market share or more

48
Q

What is an oligopoly?

A

A market structure dominated by a few large firms

49
Q

Describe some features of an oligopoly market

A

Price making firms
Firms are interdependent
High level of non-price competition

50
Q

Why may price cutting not be beneficial to an oligopoly?

A

It doesn’t bring long term benefits, and other firms will soon follow, raising marginal costs. The reduction in price reduced the elasticity of the product

51
Q

What type of competition is most prevalent in an oligopoly?

A

Non-price competition

52
Q

Give examples of typical non price competition in oligopolies

A

Large scale advertising
Competitions
Free gifts and brand names

53
Q

How may some firms try to avoid a price war?

A

Collude to form a cartel

54
Q

Define cartel

A

A group of firms that produce separately but sell at one agreed price

55
Q

Why may a cartel not be successful in the long run?

A

They’re typically illegal - could be found out. Also the nature of these firms is to cheat, so it’s likely that the cartel may internally break down

56
Q

What is tacit collusion and how does it work?

A

Tacit collusion is price leadership, involving other firms following the pricing strategy of one firm

57
Q

What is game theory and how does it apply to oligopolies?

A

A theory of how decision makers are influenced by the actions and reactions of others. Oligopolies will be aware of how their decisions will affect other firms and how this in term will affect them.

58
Q

Give features of monopolistic competition

A 
Large number of small firms 
Easy entry and exit
Product differentiation 
Price making firms
No price competition
59
Q

In the short run, in monopolistic competition, what would happen if market demand rose?

A

Firms already in the market would experience supernormal profit

60
Q

Define monopolistic competition

A

A market structure in which there is a large number of small firms selling a similar product

61
Q

How may a monopolistically competitive firm seek to improve customer loyalty? How would they do this?

A

Making their products more distinctive. Small scale advertising, after-sales service, better location of outlets and improved quality

62
Q

Why may monopolies be considered to be inefficient?

A

Output is below and price is above the allocatively efficient level. Overall, average cost is not minimised.

63
Q

What is dynamic efficiency?

A

Efficiency in terms of developing and introducing new production techniques and new products

64
Q

Why may a monopoly not achieve dynamic efficiency?

A

The lack of competition means it it doesn’t spend much on R&D, and doesn’t innovate.

65
Q

Give a counter to the idea that monopolies do not achieve dynamic efficiency

A

They may innovate, as due to their abilities to make supernormal profits in the long run, they are likely to have significant funds with which they can perform R&D, and develop new products and production methods. They are also aware of the barriers to entry and exit, which protect any supernormal profit they make from R&D.

66
Q

What is X inefficiency?

A

The difference between actual costs and attainable costs

67
Q

How is x inefficiency shown on a diagram?

A

As the gap between potential AC and actual AC

68
Q

What is organisational slack and when does it occur?

A

It’s when there is not the pressure to keep average costs low, and hence managers award themselves higher pay, over manning to ease stress on workers

69
Q

Why may it be beneficial to consumers that there are many different producers in a market

A

They benefit from the choice, and the the firms are likely to compete amongst themselves, raising the quality of their products and potentially reducing the price

70
Q

What is a contestable market?

A

A market in which there are no barriers to entry and exit, and the costs facing already existing and new firms are equal

71
Q

Give the features of a perfectly contestable market

A

No barriers to entry and exit
Costs to existing and new firms are the same
Same access to technology
No brand loyalty

72
Q

Why does a contestable market encourage dynamic efficiency

A

Firms can enter the market at any time, meaning high competitive pressure to stay efficient and innovative

73
Q

What is supernormal competition?

A

Firms quickly entering a market when there are supernormal profits and leaving it when the profits disappear

74
Q

Why may profit maximisation not be achievable in reality?

A

It can be very difficult to calculate marginal cost and marginal revenue, and most firms will use other pricing methods, such as adding a percentage of costs.
Also there is often a separation of ownership and control, who both have separate objectives - the owners to make as much money, but the managers would be less incensed to maximise profit

75
Q

What is sales revenue maximisation?

A

The objective of achieving as high a total revenue as possible

76
Q

Why may sales revenue maximisation be a better objective than profit maximisation?

A

The managers salaries are more often linked to the growth of sales than profit performance, and high sales can attract external finance and may result in greater economies of scale

77
Q

What is growth maximisation?

A

The objective of increasing the size of the firm as much as possible

78
Q

Why may profit satisfying be a more realistic objective than profit maximisation?

A

Imperfect information and conflicting objectives

79
Q

What is profit satisfying?

A

Aiming for a satisfactory level of profit rather than the highest level of profit possible

80
Q

Give an objective what may conflict in long term with profit maximisation

A

Utility maximisation

81
Q

What is utility maximisation?

A

The aim of trying to achieve as much satisfaction as possible

A2 Economics (7 decks)

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