Tracker 5 Econ Flashcards
What is a monopsony?
A market where there is only one buyer and has the same basic characteristics as a monopoly.
What are the characteristics of a monopsony?
They pay their suppliers the lowest price possible to minimise their costs as they are the only buyer. This allows them to maximise profits
What are the costs/benefits of a monopsony to firms (suppliers)
The suppliers have a consistent place to supply to - which could keep them in business
Suppliers make low profits as they sell at such a low price - they are easily taken advantage of
Low Dynamic Efficiency
What are the costs/benefits of a monopsony to the monopsony?
They have a consistent supplier as they only supply to them - makes them more reliable compared to other firms
Cheap prices as they have pricing power - lowering costs
Higher Profits, Dynamic Efficiency, Market Share
If the supplier were to go bust for whatever reason, could lead to a shortage in supply
What are the cost/benefits of a monopsony to consumers?
Lower prices as there are lower costs to the firm - means a gain in consumer surplus
Higher quality products due to dynamic efficiency
Consistent availability of goods
A fall in supply could occur depending on the PES of the market in which the monopsony buys from - if inelastic there will be less fall
What are the characteristics of a contestable market?
1) There is perfect knowledge - if a firm is making abnormal profits, other firms will enter the market
2) Freedom of entry/exit - firms can leave the market and enter whenever but will lose on sunk costs.
3) Low product loyalty
4) Short run profit maximisers that don’t collude
What are the implications of a contestable market?
Firms will enter the market if they see another firm making huge profits and will stay until competition prevents them from more profits.
This takes profits away from the original firm.
What are the conditions of a perfectly contestable market?
A perfectly contestable market produces at AC=AR because new firms will enter the market if the prices rises, bringing it back down
What are the conditions of a contestable market?
Profit maximises in short run
Firms are likely to be productively efficient in the long run, as new firms can enter the market and undercut them in prices if not
They are also allocatively efficient if producing at AC=AR
What are some of the types of barriers to entry/exit in a contestable market?
1) Legal Barrier - Laws are put into place to make it more difficult for firms to enter a market (e.g. Licenses)
2) Marketing Barriers - High levels of advertising builds up consumer loyalty, so demand becomes more price inelastic - this fends off less known businesses with lower budgets
3) High Capital start up costs - difficult to compete with big firms
4) EOS - smaller firms can’t cut their costs as easily, mean they have higher costs and have to charge higher prices - lowering their demand
What is a sunk cost?
A fixed cost that a business can’t recover if it leaves the industry (e.g. marketing budget, wages)
What is the degree of contestability?
The extent to which the gains from market entry for a firm exceed the costs of entering the market.
