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Economics > Section 4: Market Structures > Flashcards

Section 4: Market Structures Flashcards

1
Q

What would a perfetly competitive market look like

A

Infinite number of supplier and consumers
Consumers have perfect information
Producers have perfect information
Products are identical
No barriers to entry or exit
Firms are profit maximisers

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2
Q

In a perfetly competitive market what would every firm be with regards to price

A

A price taker

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3
Q

In a perfetly competitive market what would be the relationship with a markets demand curve and the marginal utility and why

A

Demand curve = marginal utility
The worth of a good to a customer decreases as quantity increases due to law of diminishing marginal utility

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4
Q

In a perfetly competitive market what would be the relationship with a markets supply curve and the marginal cost and why

A

Supply curve = Marginal cost
A producers’ marginal costs increase as quantity increases due to the law of diminishing returns

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5
Q

What is allocative efficiency

A

When a good’s price is equal to what consumers want to pay for it

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6
Q

Why does allocative efficency happen in a perfectly competitive market

A

The price mechanism ensuures that producers supply exactly what consumer demand

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7
Q

At what point is allocative efficiency achieved

A

When price is equal to marginal social cost

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7
Q

What is marginal social cost

A

The cost to a society to producing one further unit

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8
Q

Explain type of profit doesn’t exist in the long run in a perfectly competitive market

A

Supernormal profit because any short term supernormal profits attract new firms because there are no barriers to entry

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9
Q

Explain how supernormal profit is competed away

A

When supernormal profit is made new firms are attracted to the market
This causes the supply curve to shift to the right meaning the market price falls until all excess profits have been competed away

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10
Q

What is the market price equal to

A

Average revenue

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11
Q

If the market price falls below average-unit what does that mean for the firms profit

A

The firm is making less than normal profit

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12
Q

In a perfectly competitive market what would happen in the short run if the firm is making less that normal profit

A

If the selling price is still above the firm’s average variable costs then the firm may continue to trade temporarily
If it falls below the average varaible costs then it will leave the market immediately

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13
Q

What is productive efficiency

A

Ensuring the costs of production are as low as they can be

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14
Q

Why does productive efficiency come about in a perfectly competitive market

A

It comes as a result of all firms trying to maximise their profits

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15
Q

What is X-efficiency

A

Measures how successfully a firm keeps its costs down

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16
Q

What si X-efficiency caused by

A

Using factors of production in a wasteful way
Paying too much for the factors of production

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17
Q

In a perfectly competitive market what has to be assumed in order for it to have productive efficiency

A

You have to assume that there are no economies of scale
In a perfectly competitive market each firm is very small since there are infinite firms so they can’t take full advantage of economies of scale
So that means that the firms may be less productively efficient than if there was one big firm

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18
Q

What does dynamic efficiency mean

A

Improving efficiency in the long run

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19
Q

Why does a perfectly competitive market not lead to dynamic efficiency

A

There is only normal profit so no risks are taken to improve efficiency in the long run

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20
Q

What is static efficiency

A

When allocative and productive efficiency are achieved at a particular point in time

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21
Q

Why do governments want to encourage efficiency between firms

A

So firms are forced to produce efficiently to reduce costs and set a price that’s fair to their customers

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22
Q

Give six policies the government can implement to

A

Encouraging enterprise with advice and start-up subsidies
Increase consumer knowledge to make sure comparison information is available
Introduce consumer choice and competition in public sectors by creating internal markets
Privatise and deregulate large monopolistic nationalised industries
Discourage mergers and takeovers that excessively reduce new firms competing
Encourage more international competition

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23
Q

What is an incumbent firm

A

Firms which are already in the market

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24
Q

In a purely monopoly market what are the barriers to entry

A

Total

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25
Q

Explain the ways that incumbent firms may create barriers to entry

A

An innovative new product patented (legally protected so the design can’t be copied) by an incumbent firm can make it very hard for an entrant to overcome
Strong branding and familiarity with the incumbent firms products can make it very hard to make them choose and entrants product instead
Incumbent firms can aggresively lower the price to drive out competition that a new entrant can’t match
The threat of a ‘price war’ can deter entrants from joining markets

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26
Q

Explain how barriers of entry can be due to the nature of an industry

A

Some industries require high amounts of capital expenditure before a firm recieves any revenue (the cost of entering the market is huge so most firms don’t enter
If investments can’t be covered to leave a market then entering that market can be very risky and unappealing
If there is a MES of production then a smaller entrants will be operating on a higher point on the average cost curve than established firms so they will have to sell at higher prices than bigger firms

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27
Q

What is capital expenditure

A

Money spent buy a business acquiring assets

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28
Q

Explain how barriers to entry can be created by government regulations

A

An industry requiring a license can be a barrier to entry to new firms, similarly in regulated industries firms may have to be approved by a regulator before they can operate in the industry
New factories may need planning permission before they can be built
There will also be health and safety regulations and worker conditions that firms will need to keep to

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29
Q

Explain how new entrants may have their own advantages

A

Not all new entrants are small firms having to compete against bigger firms
Sometimes new entrants are large and successfull firms that wish to diversofy their products

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30
Q

What is a monolopy

A

A monopoly is a market with only one firm in it (this firm has 100% of the market share)

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31
Q

Give three reasons why monopoly power can come about

A

Barriers to entry preventing new competition to compete away large profits
Advertising and product differentiation - if consumers think that a product is more desirable than other products then a monopoly can be created
Few competitors in market

32
Q

What type of profit will a monopolist make in long and short run

A

Supernormal

33
Q

If a firm wants to maximise it’s profits what level of output will they be operating at

A

Where MC=MR

34
Q

Explain the efficiency of a monopoly

A

Their MC isn’t equal to their AC so they aren’t operating at the lowest possible point on the AC curve so monopolies arent productively efficient
The price charged by the monopoly is greater than MC so they arent’ allocatively efficient

35
Q

What does it mean when a market is at equilibrium

A

The price and quantity point at which market supply and market demand for an item are equal (supply is equal to demand)

36
Q

What is a deadweight welfare loss

A

The reduction in economic efficiency that happens when a market is not at equilibrium

37
Q

Give drawbacks of monopolies

A

No need to innovate or differentiate their product - they become complacent
No need to increase efficiency - x-efficiency remains high
Consumer choice is restricted
Monopsonist power can be used to exploit suppliers

38
Q

What industries lead to natural monopolies

A

Industries where there are large fixed costs and/or their are large economies of scale

39
Q

How might a government interact with a natural monopoly

A

May be reluctant to break up a natural monopoly because this may reduce efficiency
They might provide subsidies so the firm will increase its output to a point where supply meets demand

40
Q

What are the potential benefits of a monopoly

A

A monopolists large size may lead to economies of scale if diseconomies of scale is avoided (this means it can keep average costs low)
The security a monopolist has in it’s market means that it can focus on developing it’s products in the future - this can lead to dynamic efficiency
Monopolists can provide stable employment for workers
IPRs (Intellectual Property Rights) allow a form of limited monopoly that can actually be in consumers interests

41
Q

Name two types of IPRs

A

Copyrights
Patents

42
Q

How does an IPR benefit a firm

A

Allow a firm exclusive use of their innovative ideas for a limited amount of time
During this time supernormal profit is possible
Without the protection of IPRs firms would have little incentive to risk their resources investing in innovative ideas because other firms would be able to copy those ideas

43
Q

What is a monopsony

A

When a single buyer dominates a market

44
Q

How can a monopsonist exploit it’s suppliers

A

Can act as a price maker since they’re the only source of income for the supplier

45
Q

What is price discrimination

A

When a seller chargesa different prices to different customers for exactly the same product

46
Q

What are the conditions necessary for a firm to make use of price discrimination

A

The seller must have price making power - monopolies and ologopolies
The seller must be able to separate sellers into different groups based on price elasticity of demand
The seller must be able to prevent seepage

47
Q

What is seepage

A

When customers by a product at a lower price re-selling it themselves at a higher price to customers who could have been charged more

48
Q

What is consumer surplus

A

The difference between the actual selling price of a product and the price a consumer would have been willing to pay

49
Q

What are three different types of price discrimination

A

First/Second/Third degree price discrimination

50
Q

What is first degree price discrimination

A

Where each individual customer is charged the maximum they would be willing to pay
This method is unlikely because of the cost of gathering the information and the difficulty of preventing seepage

51
Q

What is second degree price discrimination

A

Often used in wholesale markets where lower prices are charged to people who purchased large quantities
Encourages large orders

52
Q

What is third degree price discrimination

A

When a firm charges different prices for the same product to different segments of the market
These segments could be:
- Customers of different ages
- Customers who buy at different times
- Customers who buy at different places
To maximise profit the seller would set a price at a level for both groups where MC = MR

53
Q

Does price discrimination lead to allocative efficiency

A

The average revenue is greater than the marginal cost so price discrimination doesn’t lead to allocative efficiency because that happens when price is equal to marginal cost

54
Q

What is a concentrated market

A

When some industries are dominated by just a few companies

55
Q

How do you find the level of domination of a company in a market

A

Level of domination is measured by the concentration ratio
Divide the amount that the company is worth and divide it by the value of the market and multiply it by 100 to get the percentage value

56
Q

Give the two ways to define an oligolopy

A

A market that’s dominated by a few firms that has high barriers to entry in which firms offer differentiated products
A market in which firms are interdependant and where firms use competitice or collusive strategies to make this interdependance work to their advantage

57
Q

What are the two strategies that firms in an oligopolistic market can adopt

A

Competitive behaviour
Collusive behaviour

58
Q

Explain collusive behaviour in an oligopolistic market

A

When firms cooperate with each other especially with what prices are charged
Formal collusion involves an agreement between firms (this is usually illegal)
Informal collusion is a tacit (happens without any kind of agreement) - this is when firms know what’s in their best interests and choose to not compete as long as the other firms do the same
Some firms in a collusive oligopoly can act as price leaders and can choose to change prices and the rest will normally follow

59
Q

When is competitive behaviour in an oligopolistic market more likely to happen

A

When one firm has lower costs than the others
When theres a large number of firms in the market
When the firms produce products that are very similsar
When the barriers to entry are relatively low

60
Q

When is collusive behaviour in an oligopolistic market more likely to happen

A

When the firms have similar costs
When there are a small amount of firms
When brand loyalty means customers are less likely to switch
When barriers to entry are high

61
Q

What are the two assumptions present in the kinked demand curve

A

If one firm raises its price, then the other firms will not raise thers
If one firm lowers its prices, the other firms will also lower theirs

62
Q

In the kinked demand curve model what is the relationship between price and demand

A

When price is increased demand is elastic
When price is decreased demand is inelastic

63
Q

In the kinked demand curve model why do firms that choose to decrease their products lose out

A

Rest of the firms will lower their prices aswell so the firm won’t gain market share and their average price will fall

64
Q

What is game theory

A

The mathematical study of strategic interactions

65
Q

What is the first-mover advantage

A

If two firms are deciding what output level they choose to operate at and one firm chooses to operate at a high output then it would be the in the other firms interest to operate at a low output level

66
Q

What are the conditions necessary for monopolistic competition

A

Some product differentiation due to advertising or real differences between products:
- This means the seller has some degree of price-making power
- So each seller’s demand curve slopes downwards
- But the smaller the product differences the more price elastic the
demand for each product will be
There are either no barriers to entry or only very low barriers to entry:
- This means that if very high supernormal profits are earned, new
entrants can join the industry easily

67
Q

In monpoilistic competition when is the only time that supernormal profits can be earned

A

In the short run
The barriers to entry and the product differentiation means that supernormal profit can be made

68
Q

In monpoilistic competition when is the time where exclusively normal profits are earned

A

In monopolistic competition new entrants will join the industry because of the low barriers to entry
This will causet he established firm’s demand curve to shift the left until only normal profits can be earned - the demand curve meets tangentially to the AC curve so the firms isn’t operating where the AC is at it’s lowest so it is not productively efficient and the equilibrium price is greater than MC this is not allocatively efficient

69
Q

Explain the process of a monopolistic competition going from resembling a monopoly to resembling a perfect competition

A

In the short run the barriers to entry and the product differentiation means that supernormal profit can be made
This resembles a monopoly since new entrants haven’t joined yet
This market will begin to resemble a perfect competition as new entrants enter the market and compete away the supernormal profit

70
Q

What is monpololistic competition

A

When many companies are in the same market but the products are slightlty differentiated so they are’nt perfet substitutes

71
Q

Where on the AC curve are firms operating on if they are in a monopolistic competition

A

They aren’t operating on the lowest point of the AC curve

72
Q

Describe the difference in prices in perfect competition and monopolistic competition

A

The prices are higher in monopolistic competition because they have to differentiate their product causing them to have higher costs

73
Q

Why do firms in monopolistic competition don’t take advantage of economies of scale

A

Because they have they have chosen to restrict output in order to maximise profits

74
Q

What is contestability

A

How open a market is to new competitors

75
Q

What are the characteristics of a contestable market

A

The barriers to entry and exit are low - if excess profits are made by incumbent firms, new firms will enter
Supernormal profits can potentially be made by new firms

76
Q

Give six things that can increase the barriers to entry

A

There are patents on key prooducts and production methods
Advertising by incumbent firms has already created strong brand loyalty
There’s a threat of limit pricing by the incumbent firms
Trade restrictions are present - these don’t allow foreign entrants to compete on equal terms with the incumbent firms
Incumbent firms are vertically integrated
If sunk costs are high they create barriers to exit - e.g. expensive equipment or large costs on advertising

77
Q

What is a hit and run tactic

A

Entering a market when supernormal profits can be made and leaving when they can’t anymore

Economics (5 decks)

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