Theme 3 - Market structures Flashcards
What is productive efficiencies?
This is when MC=AC therefore average costs is at its lowest
What is allocative efficiency?
This is when welfare is maximised therefore MC=Price or MC=Demand
What is X-inefficiency?
This is when AC is higher than the AC diagram for a given level of output
What is dynamic inefficiency?
This is when overtime, changing technology improves a firms output potential over time.
What is perfect competition?
When there a many buyers and sellers in the market
What are the 4 conditions for a perfectly competitive market?
- Many buyers and sellers in the market
- No barriers to entry and exit
- Homogenous goods
- Perfect information
What are price makers and price takers?
A price makers is a firm that dictates the price in the market and other competitors will follow
A price taker is a firm that will likely take the market price because there are so many competitors in the market that if they sell for any higher, demand will fall to 0
What is the market diagram in perfect competition?
This is a standard demand and supply diagram and shows that price makers will sell their goods at the equilibrium price because the firm will be able to sell all their goods as there are so many sellers in the market
Why is the demand curve perfectly elastic in perfect competition?
AR is equal to demand because the revenue gained for each good is the same as price. MR is also equal to D and AR because each unit is sold at the same price so extra revenue gained will remain the same
What happens in the short run in a perfectly competitive market?
Firms will supply above AC to maximise profits. This means firms make a supernormal profit in the short run
What happens in the long run in the a perfectly competitive market?
As more competitors enter the market due to them being incentivised to make supernormal profits, this will cause competitors to take more customers. This may reduce MR and AR and therefore lead AC meeting the AR curve so firms make a normal profit.
What happens in the long run in the a perfectly competitive market?
As more competitors enter the market due to them being incentivised to make supernormal profits, this will cause competitors to take more customers. This may reduce MR and AR and therefore lead AC meeting the AR curve so firms make a normal profit.
What characteristics does a monopolistic competition market have?
- Many small buyers and sellers
- Low barriers to entry and exit
- Differentiated products
Describe a short run monopolistic competition market.
A normal monopoly diagram and firms supply where they are profit maximising.
Describe a short run monopolistic competition diagram.
A normal monopoly diagram and firms supply where they are profit maximising.
Describe a long run monopolistic competition diagram
Instead, the AC curve will meet the AR curve so price is equal to the costs
What is product and process innovation?
Product - new products to meet the ever changing needs and wants of a consumer
Process - New tech to revolutionise new production processes
What are 3 evaluation points for monopolistic competition?
- Heavy spending on marketing and advertising which could worsen the economic problem
- Bounded rationality means too much choice may harm consumers ability to make a rational decision
- Prices are still higher than MC so allocatively inefficient
Who is Joan Robinson - monopolistic competition
In it she laid out a model of competition between firms, each of which had some monopoly power.
What are the 6 factors that determine an oligopoly?
- High barriers to entry and exit
- Small number of firms in the market
- Products are differentiated
- Interdependence
- High concentration ratio
- Non - price competition
What does a kinked demand curve show?
Price rigidity
What is price rigidity?
Firms won’t raise prices because customers will move to competitors for cheaper prices. Firms also don’t want to raise prices because they are profit maximisers
How does a prisoners dilemma show an incentive to collude?
The Nash equilibrium is when both firms don’t take risks and set a low price which would result in lower profits. If both firms collude, this means that firms can benefit from higher prices
How to calculate N-firm concentration ratios?
3 - firm conc ratio: add top 3 firms ratio
- the same with a 5 firm conc ratio
Overt collusion: cartel
A formal agreement between two firms to collude in the operation which goes against the interest of consumers
Tactic collusion: price leadership
Dominant firm sets a price and the other firms follow.
Higher prices and lower output
Types of price competition?
- Price wars
- Limit pricing
- predator pricing
What is limit pricing?
When a firm operates below the profit maximising output of MC=MR. They will still make a profit but limits new entrants as prices are too lo for new entrants to make profits
What are types of non-price competition?
Innovation
Quality of service
Free upgrades
Exclusivity
Branding
Sales promotion
What is the difference between a pure monopoly and a market monopoly?
A pure monopoly is when there is only one market in the market. A market monopoly is when a firm has more than 25% in the market
What are the 5 main characteristics of a monopoly?
- One firm in the market
- Profit maximisers
- Supernormal profits SR/LR
- High barriers to entry
- Information gaps
Why is supernormal profit made in a monopoly in the short run and long run.
In the short-run, firms are profit maximisers and so set prices higher than costs. This allows them to make supernormal profits because they are the only firm in the market. In the LR, due to high barriers to entry, firms cannot enter the market and so they make supernormal profits in the LR too.
What is third degree price discrimination?
This is when a company segments a group of people with similar characteristics and therefore will be charged different prices depending on their elasticities.
What are some advantages of price discrimination?
- low income demographic benefit from low prices
- more revenue generated if higher prices charged to richer consumer
- Increases output
What are some disadvantages of price discrimination?
- Problems with ‘reselling’
- reduction in consumer surplus
- administrative costs for separating markets
3 benefits to monopolies?
- Economies of scale can drive down unit costs to be more productively efficient
- Be more dynamically efficient
- Process and product innovation
4 costs of monopolies?
- Removes competition
- Allocatively, productively and X-inefficient
- consumers are exploited
- Reduces choice and quality in the market
What is the difference between process and product innovation?
Product = when an existing product or service is adapted
Process = When a process is originally created
What is the difference between process and product innovation?
Product = when an existing product or service is adapted
Process = When a process is originally created
What is a natural monopoly?
A single firm that can serve the market at lower prices than any combination of two or more firmsb
What is nationalisation?
This is when a business goes from being privately owned to state-owned
What are 2 benefits of nationalisation?
- Funded by the government which means there isn’t a small cap
- Natural monopoly means no exploitation of monopoly power
What are 2 benefits of nationalisation?
- Funded by the government which means there isn’t a small cap
- Natural monopoly means no exploitation of monopoly power
What are 2 drawbacks of nationalisation?
- Lowe employee wages as there is no incentive by the government to raise them
- Under-funded if government wants to fund elsewhere
What is a monopsony?
There are many sellers in the market and there is only one buyer. They have monopsony power to set the prices they want suppliers to charge them.
What are 3 benefits to firms of monopsony power?
- Lower costs for firms - economies of scale
- Greater profit margins
- Productive efficiency, x-efficiency, supernormal profits means dynamic efficiency.
What are 3 negatives of monopsony power?
- Suppliers are being exploited meaning they have lower profits so they may have lower incomes
- Closer to shut down point
What are to benefits to consumers to monopsony?
Lower costs may means that consumers benefit from lower prices
Dynamic efficiency also means lower costs and lower prices as well as innovation for consumers
What is a contestable market?
A competitive market due to the low barriers to entry or exit
What are the 5 characteristics of a contestable market?
- No sunk costs
- Freedom to entry and exit
- Perfect knowledge
- High number of potential entrant
- Equal access to industry technology
What is hit and run competition?
This is when a firm enters the market to exploit supernormal profits and then leaves
What is an incumbent firm?
A firm that already exists in the market
What are 3 cons of a contestable market?
- Firms may no longer make supernormal profits in the long run
- Negative externalities may exist
- Lowering costs may mean lower wages for employees
What is a cartel?
A group of producers acting together, restricting the supply to force up the price
What are the factors necessary for the success of a cartel?
- They have to act as a monopolist
- All major producers have to be members of the cartel
- No new substitutes in the market - high barriers to entry
- The supply must be controlled - inelastic demand
