Uplearn Market Structures Flashcards
What are the 5 market structures?
- Monopoly
- Perfect Competition
- Monopolistic Competition
- Monopsony
- Oligopoly
What is the N-firm concentration ratio and how do you work it out?
Measures how much market share the N (number) largest of firms have
How to work out:
- Identify the N largest firms in the market
Add up their market share
What is a legal monopoly?
A firm is considered a legal monopoly when its market share is over 25%
What is a pure monopoly?
Only one firm in the market has 100% market share.
It is rare, closest is google with 88% market share
When modelling monopolies, what do economists assume to simplify things?
- only one firm in the market with a 100% market share
- the firm is a profit maximiser (where MR = MC)
- There are high barriers to entry
What are the 5 barriers to entry?
Sunk costs
Legal barriers
Economies of scale
Anti-competitive practices
Brand loyalty
What are the legal barriers?
Include patents, trademarks and copyrights - and they allow firms to legally prevent other firms from stealing their ideas and entering their market.
What are sunk costs?
costs that cannot be recovered (e.g. advertising)
high sunk costs are barriers to entry as they deter new firms from entering the market because the firm knows if they fail, they won’t be able to recover any of their sunk costs
Name the 6 types of internal economies of scale
MMEMOCIC - Richards’s mum flies past the moon
Risk-bearing
Managerial
Financial
Purchasing
Technical
Marketing
Define anti-competitive practices
Anything a firm does to reduce or restrict competition
Where is profit maximisation on curve?
MC = MR
What efficiency is a monopoly?
p inefficient, a and X
possibly dynamic inefficient
Why do the government support and own monopolies, if we know monopolies are productive, allocative and X-inefficient?
natural monopoly argument.
A natural monopoly is when it’s naturally most efficient if only one firm is in the market.
E.g. with public transport, it would be very inefficient if London had multiple transport networks, it’s most efficient to have just one (like TFL) in control of everything
Define a natural monopoly
when it’s naturally most efficient if only one firm is in the market.
Why do natural monopolies exist?
Two reasons:
- high sunk costs
- huge economies of scale
To fully exploit economies of scale and reach its minimum efficient scale, the natural monopoly has to increase its sales massively which it can only do if it’s the only seller in the market
Why does marginal cost decrease then increase?
Marginal cost initially decreases because as output increases and more workers are hired, they can specialise; increasing productivity and decreasing marginal cost.
But marginal cost will then increase because diminishing marginal returns will decrease productivity, increasing marginal cost.
Explain relationship between AC and MC
AC is a smiley face (U curve) , when MC is below AC, AC decreases, when MC is above AC, AC increases
Define price discrimination
When a firm charges different groups of consumers different prices, but for the same good
What are the 3 conditions of price discrimination?
The firm must have market power: it must be able to change their prices
The firm must have information on consumers’ elasticities: it must be able to identify which consumers are elastic and which are inelastic
The firm must be able to limit reselling: it must be able to limit elastic consumers from selling cheap tickets to inelastic consumers; like how trains require student IDs or student Oysters, to stop inelastic adult consumers using resold student tickets!
What are the 4 features of perfect competition?
- many small buyers and sellers
- no barriers to entry or exit
- homogenous products
- perfect information
What is PED at elastic demand?
Between -1 and - infinity
