theme 3- 3.4 market structures Flashcards
efficiency
measures how well resources are used
e.g. output relative to another factor
allocative efficiency
occurs where the price = Marginal cost of production
means that people are paying the exact amount it costs to produce the last unit
allocative efficiency (Ae) on a graph
at the point where the AR curve meets the MC curve
productive efficiency
occurs where a firm operates at the output at which average cost is lowest
i.e. the lowest point of the AC curve
effect of selling at productive efficiency
if price = AC, this is the lowest price the customer can enjoy
for consumer surplus and effective use of factors of production = optimum output
BUT v little incentive for firms to operate at Pe
dynamic efficiency
arises when a firm uses its resources more efficiently and productively over time (LONG TERM)
ways dynamic efficiency is achieved
- innovation resulting from R&D -> new products
- investment in new production processes
- investment in human capital- training
- improvements in working practises and labour relations
X-inefficiency
occurs when costs rise because there is a lack of competitive pressure in a market
can lead to organisational/managerial slack
happens in monopolies
x-inefficiency on a graph
upward shift in the average cost curve
market structures
the ways in which firms are competing
range from monopoly (no competition)
to perfect competition
perfect competition efficiency overview
productively efficient in SR? No
productively efficient in LR? Yes
allocatively efficient in SR and LR? Yes
monopolistic competition efficiency overview
not productively or allocatively efficient at any time
oligopoly efficiency overview
not productively or allocatively efficient at any time
monopoly efficiency overview
not productively or allocatively efficient at any time
assumptions of perfect competition
- many buyers and sellers that are price takers, firms have a horizontal demand curve AR = MR
- goods sold are homogeneous
- no barriers to entry/exit
- perfect knowledge of info
- all firms aim to max profits, MR = MC
short run profit maximising equilibrium (perfect competition)
market price is determined by the interaction of supply and demand
each firm is a price taker so faces a perfectly elastic demand curve
price = above average cost of production so the firm is making supernormal profit
long run profit maximising equilibrium (perfect competition)
supernormal profit acts as a signal to other firms to enter the market
-> thus supernormal profit will be competed away in the long run
new firms cause the supply curve to shift to the right and price to fall -> only make normal profit
firms making a loss in the short run
when a perfectly competitive firm is making a loss, average cost will be higher than average revenue at the profit maximising output
does the firm in perfect competition automatically shut down in the short run when it makes a loss?
no barriers to exit- makes sense to leave
has fixed costs in the short run that has to be paid- question is whether they make a bigger loss paying them or waiting for the cost to be variable- needs to look at the shut down point (where price covers AVC)- if can’t = should shut down
impact of firms leaving the industry
causes a leftward shift in the market supply curve, and therefore a decrease in industry output
this causes a rise in the market price
impact on firms remaining in the market
price will rise and their output will also
-> as there are fewer firms in the market
MC rises as MR rises
monopolistically competitive markets- overview
like perfect competition, but with differentiated products
means that firms have some price-setting power and little market power
characteristics of monopolistically competitive markets
- many buyers and sellers
- goods sold are differentiated
- firms are price makers facing a downwards sloping demand curve
- low barriers to entry and exit
- all aim to maximise profits (MR=MC)
- some brand loyalty but no strong brand names
short run profit maximising equilibrium
the demand (AR) curve is twice as steep than the MR curve
-> means the firm has some market power, some influence over price
AR is above AC, so the firm is making supernormal profit
long run profit maximising equilibrium
the supernormal profit acts as a signal to other firms to enter the industry
no barriers to entry, so all firms can enter
AC and AR curves are tangential at the profit maximising output
thus, supernormal profit will disappear and the firm will only make normal profit
oligopoly definition
when a few firms are dominating the market