Theme 3.4:Market Structure

Question 1

what is allocative efficiency?

Answer 1

measures whether resources are allocated to those goods and services demanded by consumers occurs where P=MC

Question 2

what is productive efficency?

Answer 2

when a firm is operating at its lowest point on the AC curve

Question 3

what is x-inefficieny?

Answer 3

when a firm is not producing at their lowest possible cost for a given level of output.
occurs within the AC curve.

Question 4

what is dynamic efficiency?

Answer 4

the re-investment of long run supernormal profits.
occurs when AC curve moves downwards.

Question 5

what are the characteristics of perfect competition.

Answer 5

-many buyers/seller
-homogenous goods
-firms a price takers
-no barriers to entry/exit
-perfect information

Question 6

what is a key industry example?

Answer 6

agriculture:
-there are large numbers of buyers/sellers and it’s easy to buy and sell

Question 7

what are SR and LR profits like in perfect competition?

Answer 7

-supernormal profits don’t last in the long run
-market and price mechanisms will adjust as no barriers to entry and other firms see supernormal profits and enter.
-competition will reduce the supernormal profit to normal profit

Question 8

what are the characteristics of a monopoly?

Answer 8

• one firm dominates the market (25%)
  -high barriers to entry
  -firm is profit maximiser
  -imperfect information

Question 9

what are the barriers to entry?

Answer 9

(Lloyds TSB)
Legal-insurance, regulations
Technical-start up costs
Strategy
Brand loyalty- the brand itself

Question 10

what are supernormal profits like in a monopoly?

Answer 10

SN profit stays in the LR as barriers are high so competition won’t enter the market.

Question 11

what do monopolies cause?

Answer 11

a deadweight loss = a cost to society as a whole that is generated by an economically ineffcient allocation of resources within the market.

Question 12

what is price discrimination?

Answer 12

charging different prices to diff consumers for identical goods/services

Question 13

what must price discrimination have?

Answer 13

-price making ability
-information to seperate

Question 14

what is an example of price discrimination?

Answer 14

people pay different prices for a plane ticket

Question 15

what is 3rd degree price discrimination?

Answer 15

segement the market in 2 groups who have different PEDs

Question 16

what are pros of a monopoly?

Answer 16

-monopolies can use price discrimination to maximise profit from every consumer and can be re-invested leading to dynamic efficiency

Question 17

what are the cons of a monopoly?

Answer 17

-exploits consumers
-could widen inequality
-anti-competitive so won’t lead to allocation efficiency.