Th3.4: Sunk Costs and the Degree of Contestability Flashcards

1
Q

What is a sunk cost?

A

a fixed cost that a business cannot recover if it leaves the industry - it includes property, machinery and equipment that cannot be sold, and advertising

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2
Q

Why will all businesses face sunk costs?

A

because even if things are resold it is generally for a lower price

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3
Q

What is the degree of contestability measured by?

A

the extent to which the gains from market entry for a firm exceed the costs of entering the market

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4
Q

What is a perfectly contestable market?

A

a market with no sunk costs and no barriers to entry or exit

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5
Q

The more contestable a market…

A

the more unstable it will be as there can be regular hit and run competition

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6
Q

Why is no market likely to be perfectly contestable in reality?

A

as there is always likely to be some sunk cost

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