Theme 3: Market Structure Flashcards
Dynamic efficiency
Improving efficiency in the long term
-carry out research and development to improve existing products of development new ones
-invest in new technology or training improve production process
Productive efficiency
-MR=MC
-ensuring costs of production are as low as they can be
-direct result of a firms trying to maximise their profits
X efficiency
How successfully a firm keeps it costs down
Oligopoly
-high barriers to entry and exit
-high concentration rate
-interdependence of firms
-product differentiation
Price competition
-price wars
-predatory pricing
-limit pricing
Perfect market
-infinite numbers of suppliers and consumers
-consumers have perfect information
-producers have perfect information
-products are identical
-no barriers to entry
-profit maximising
Natural monopolies
-high fixed costs, large economies of scale
-have a lot of monopoly power
Contenstable
-low barriers to entry and exit
-supernormal profits can potentially be made by new firms
-consumer loyalty
-alloacative efficiency
Advantages of monopolistcally competitive markets
-firms are allocativly inefficient in the long and short run
-since firms do not fully exploit their factors there is excess capacity in the market this makes firms productively inefficient
-wide variety of choice
-supernormal profits produced short run might increase their Dubai
Disadvantages of monopolistscslly competitive markets
In the long run dynamic efficiency might be limited due to lack of supernormal profits
Firms are not efficient as those in perfectly competitive market
Collusion
-loss of consumer welfare
-absence of competition means efficiency falls
-monopoly power of existing firms makes it hard for new firms to enter
-industry standards improve
-excess profits could be used for investment which might improve efficiency in the long run
-increasing size firms can exploit economies of scale which will lead to lower prices
Types of price competition
Price wars
Predatory prices
Limit pricing
Costs a of monopolies to firms consumers employees and suppliers
-higher prices and profits and inefficiency may result in misallocation of resources
-no incentive to become more efficient production costs are high
-loss of consumer and producer surplus
-monopolies can earn significant supernormal profits
-yield more positive externalities
-natural monopoly more efficient for one firm to provide the good or service
-generate export revenue
-monopolies are large exploit economies of scale
-high profits could be a source of goverment revenue through tax
Sunk costs
-markets have potential to be contestable
-sunk costs are barrier to contestability
—high sunk costs less favourable to enter
