Theme 4 Flashcards
Market structure
Number of firms within an industry and the way in which those businesses behave .
Concentration ratio (CR)
Number of firms that dominate the market.
Perfect competition
- Large number of small producers
- No barriers to entry
- Demand is perfectly elastic
Monopoly
One firm dominates the market
- Price leaders
- Can charge high prices but restricted
- Entry barriers, economies of scale
- Use promotion
Duopoly
Two firm dominates the market
- Price leaders
- Can charge high prices but restricted
- Entry barriers, economies of scale
- Non price competition
- Collusion
Oligopoly
Few firms dominates the market
- Price leaders
- Can charge high prices but restricted
- Entry barriers, advertisement
- Non price competition
- Collusion
- Branding
- Interdependence of firms
Monopolistic competition
Large number of firms in the market selling differentiated products.
- Low entry barriers
- Small degree of monopoly
Contestable markets
Market structure that is competitive because of a lack of barriers to entry.
- Freedom to enter or exit the market
- No sunk costs
- Perfect knowledge
Dynamic efficiency
Might occur as firms innovate production processes in order to lower AC.
Barriers to entry
Any factors that stop a firm from entering a market.
Barriers to entry examples
- Product differentiation
- Branding
- Start-up costs
- Intellectual property rights
- R&D and technology change
- Economies of scale
- Unfair competition
N-firm concentration ratio (CR)
Measurement of the market share of the n firms that dominate the market.
Tacit agreement
Can occur in oligopolies where firms agree to manipulate the market in some form.
Price wars
Occur when a firm lowers price in order to increase market share.
Limit-pricing
Occurs when a firm operates below the profit maximising output of MC = MR.
First degree price discrimination
Firm is able to charge the maximum possible price to individual consumers.
Second degree price discrimination
Occurs when different prices are charged based on the quantity demanded.
Third degree price discrimination
Occurs when the firm identifies groups of consumers with similar characteristics.
Profit maximisation
Occurs where MR = MC.
Revenue maximisation
Occurs where MR = 0.
Sales maximisation
Occurs where AR = AC.
Economic efficiency
Occurs where we have allocative and productive efficiency at the same time.
Efficiency is influenced by
- Increased use of technology
- Investment in human capital
- Improved quality management
The minimum efficient scale (MES)
That scale of production where the long run average cost curve is at its lowest point.
Market orientation
Outward looking approach to new product development where the key focus is on what products the consumer wants.
Collusion
When firms in an oligopolistic market agree to act as one firm in order to benefit from elements of monopoly.
Cartel
Formal agreement between firms to collude in the operation of the market.
Monopsony
When there is only one buyer in the market.
Competition policy
Seeks to improve the competitive nature of markets.
Anti-competitive practices
Those that reduce competition in markets.
Privatisation
Transfer of assets from the government to privately owned businesses.
Natural monopoly
Occurs when there is only one producer in an industry.
Regulation
Creation of rules and sanctions within an industry in order to chnge the behaviour of firms.
Merit/Demerit goods
Merit
- Deemed to be beneficial for society, under-provided by the market.
Demerit
- Deemed to be bad for society, over provided by the market
Factor immobility
Occurs because it is difficult for factors of production to be put to alternative uses
- Labor immobility
- Capital immobility
- Land immobility
Information failure
Type of market failure where consumers or producers
- Do not have perfect knowledge
- Have asymmetric knowledge
Ways in which governments intervene to correct market failure
- Provision of merit goods
- Indirect taxation of demerit goods
- Tradable pollution permits
- Provision of information
- Legislation
- Regulation
Pollution permits
Allow firms to produce a legal level of pollution every year.
Multiplier effect
Initial injection into the economy causes a larger final increase in the level of real national output.
Marginal tax
Percentage of tax paid on an additional £1 of earnings.
Supply side policy options to increase incentives
- Cutting Income Tax
- Cutting Corporation Tax
- Modification of Welfare Payments
- Investment Grants
- Subsidies
Supply-side policy options to promote competition
- Deregulation
- Privatisation
Supply-side policy options to reform labor market, improve skills, quality and quantity of the labour force
- Reformation of Trade Unions
- Training and Education
Roles of the financial market
- To mobilise savings for lending to firms and individuals
- Lend to business for investment in working capital
- Lend to individuals
- Facilitate the exchange of goods and services
- Assess creditor risk
- Provide forward markets
- Provide a market for equities
Forward market
Allows economic agents to set the price of an asset today for delivery in the future.
Main functions of a central bank
- Maintain financial stability in the monetary system: banker to the banks
- Help the government maintain macroeconomic stability
Organisational culture
Values and standards shared by people and groups within an organisation.
