Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Microeconomics > 3.4 Market Structures > Flashcards

3.4 Market Structures Flashcards

1
Q

Allocative Efficiency

A

MC=AR
The socially desireable level of output
Minimising their costs

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Productive Efficiency

A

MC=AC
Where the firm produces at their lowest possible cost

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Profit maximising point

A

MC=MR

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Dynamic efficiency

A

When a firm reinvests into R+D and innovation, become more efficient, reduce costs, increased SNP

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Characteristics of Perfect Competition

A

Very large no of small firms
No barriers to entry/exit
Perfect knowledge of the market
Firms are so small they cannot set prices - price takers
All firms produce homogeneous goods (can’t distinguish/no branding or brad loyalty)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Perfect Comp SN profits (SR)

A

If AC is below AR, they will be making SNP. Other firms will be attracted to this and as there is perfect info and no barriers, they too will join the market. Meaning that S shifts right, decreasing industry price, demand falls - firms make normal profit

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Perfect Comp Losses (SR)

A

If firms are loss making, they will begin to leave the industry. S will shift right and prices increase. (firms can make normal profit). Isn’t attractive to new entrants. No SNP is being made but costs are covered.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Drawing perfect competition

A

Draw an S+D graph for the industry which then sets the price for the firm.
Demand is perfectly elastic (if firms increase price, D falls to 0 as goods are homogeneous)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Characteristics of Monopolistic competition

A

Very large no of small firms
Low barriers to entry/exit
Perfect knowledge of the market
Firms can raise their prices without losing their entire market share
All firms produce slightly differentiated goods (extent of brand loyalty)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Drawing Monopolistic

A

MR is twice as steep as AR
MC cuts AC at it’s lowest point
Not Productively/Allocatively efficient

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Characteristics of Oligopolies

A

Few firms dominate an industry: a large proportion of the industry’s output is produced by a small number of firms.​
Differentiated products
Interdependence of firms
High barriers to entry

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Drawing Oligopoly

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What is the the concentration ratio

A

The proportion of market share of the largest firms in the industry.

CR4 = 60% four firms own 60% of MS

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Define Barriers to entry

A

Aspects of a market which are designed to block potential entrants from entering a market profitably
BtE allow firms to continue making SNP in the LR

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Types of barriers to entry

A

Natural (exist due to industry structure): High sunk costs, High fixed costs, EoS, Vertical integration
Artificial (created by firms to deter entrants): Strong brand image, legal restrictions, collusion, pricing strategies[ set P below AVC]

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Define collusion

A

collective agreements between firms that are either formal or tacit with an aim to reduce competition

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Who monitors/enforces anti-competitive behaviour

A

CAM: Competition and markets authority
Anti-competitive behaviour is prohibited in the UK

Leniency programme

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Does the CMA’s fine deter firms from colluding

A

No, as the supernormal profits outweigh the CMA’s fine.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Sanctions for collusions

A

Leniency programme incentives
Direct the firm to modify or terminate the agreement
Impose a financial penalty of max 10% worldwide turnover (if it has been committed internationally or negligently)
Disqualification of managers of up to 15 years
Possible criminal sanctions - max 5 years prison

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Why cartels?

A

Increase prices by removing competition
Remove the incentive for businesses to operate efficiently and to innovate
Consumer choice is weakened

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Overt collusion: Cartel

A

Overt and most extreme case of collusion - An agreement between businesses not to compete with each other
price fixing, bid rigging, market sharing, output restrictions

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Cartel - Estate Agent case study

A

[Price fixing] Kept their fees high - min commision rates of 1.5% = denied local homeowners the chances of getting a better deal when selling their homes - Decreases CS
Market share was as much as 95%
They took it in turns to police the agreement
Fined £370,000 by the CMA, 6th fine not fined as they confessed their involvement

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Cartel - Fender case study

A

They sold their guitars at/above min price and forced retailers to increase their online prices
Fined £4.5mil but annual SNP of £380mil outweighs the fine, employees deliberately covered up
Means consumers could not shop for the best price, significant decreased CS

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Tacit collusion

A

When firms’ behaviour indicates that they have reached an understanding on pricing and output decisions.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

Tacit collusion: price leadership

A

The dominant firm increases prices and others follow, the price leader will set a price high enough for even the most inefficient firm to still make profit. It can be very complex to prove
i.e rising prices in the UK utility companies

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

Collusion graph

A

They work together to set a price
Firms act as a (monopoly) single producer
They charge a monopoly price
Restrict output
Make SNP in SR and LR
Not PE or AE: oligopoly price is much higher and Q is much lower
Market failure: P is greater than the SOL
Q is under-produced
SOL is AE where MC=AR

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

Demonstrate a CMA fine on a graph

A

Oligopoly graph, CMA impose the fine (ie £4.5mil)
AC would shift up to AC2
This is a fixed cost and would not change with output. Show old SNP and then reduced.

28
Q

Game-theory

A
29
Q

Nash equilibrium

A

Each individual in the group makes the decisions for their own personal benefit. Based on what he thinks others will do.

30
Q

How does the payoff matrix illustrate interdependence

A

It shows the different decisions a firm may make and how the outcomes of these decisions affect another firm

31
Q

How does the payoff matrix illustrate the incentive to collude

A

As there is really a dominant strategy, it shows the incentive as far as firms agree to predict better outcomes for all

32
Q

Draw the payoff matrix

A

box, low price, high price, both firms

33
Q

What is a dominant strategy

A

A single strategy that provides the best outcome for a firm, irrespective of the strategy which other firms adopt.

34
Q

What does a kinked demand curve show

A

Shows the price rigidity because of interdependence and elasticity

35
Q

Define non-price competition

A

Firms promotions and marketing strategies which aim to develop brand loyalty and make the AR curve more inelastic and shift AR and MR (artificial barrier to entry)

36
Q

Why would an oligopolist cut prices below P1

A

Rivals will feel forced to also lower their prices to avoid losing customers to the other firm. Therefore PED is relatively inelastic (demand is relatively unresponsive to change in P)

37
Q

What would happen if an oligopolist raises its prices

A

Competitors will not follow suit, as they will gain customers from the other firm. PED is more elastic as consumers would switch

38
Q

What happens to profit in non-price competition

A

Often decreases, IDO on the size of the shift in AC compared to the shift in AR.
AC can shift up
AR can be elastic/inelastic

39
Q

Why would N-P competition not raise revenue

A

The amount they spend on the (marketing, advertisement..) can increase their fixed costs, shifting AC up and lowering their SNP

40
Q

Define price competition and when it takes place

A

Usually in oligopolistic markets, firms either collude on price or have rigid prices (as evidenced by the kinked DC)
In certain circumstances they may engage in types of price competition

41
Q

Define predatory pricing

A

When an established firm is threatened by a new firm entering the market or an existing firm, so they set such low prices so that the new entrant is unable to make profit. Once the entrant leaves the firm, they can raise their prices again. PED is now inelastic due to the lack of available substitutes

42
Q

Predatory pricing and SRSP

A

When they reduce their prices, they often take them below AVC (AVC>AR). They are loss making and cannot even cover their average costs.
In the SR they are making a loss, in the LR they are making SNP
It can be financed through retained profits and income from other (sectors/ assets?)

43
Q

Limit pricing

A

This occurs when firms set a low enough price to deter new entrants from joining the market. Price is likely to be less than the profit maximising points (MC=AR)
This isn’t always illegal

44
Q

Price wars

A

when non-p competition is weak (brand loyalty/advertising)
Often happens with staple goods. PED is relatively elastic. It can be difficult for them to collude.

45
Q

[Graph]
Why would an oligopoly not want a price war

A

A kinked demand curve. Showing SNP (because prices were stable/rigid) If there is a price war, they reduce P to P2. Firm is now making a loss
[just show a SNP then move P down to show loss]

46
Q

[Graph] Limit pricing

A

Cost revenue diagram showing SNP.
Lower prices
Making less SNP of // Making a loss of

47
Q

[Graph] Predatory Pricing

A

SNP of
prices falls to P2
loss of
(make sure AC is big enough for the 2nd quantity)

48
Q

Why might pricing strategies not increase their revenue

A
  • kinked demand curve = elasticities
  • payoff matrix to show if one lowers prices and one leaves the prices the same
49
Q

Characteristics of Monopoly

A
  • one firm
  • market failure [artificially ^ P and artificially low output] they have price setting and output restricting abilities
  • lack of available subs = inelastic
  • high barriers tp entry and exit
  • imperfect knowledge
50
Q

Drawing monopoly graph

A

Cost/revenue graph
AR/MR very inelastic
Making SNP (no available subs/ barriers)
Deadweight loss
[can also draw on Perf Comp as a comparison to show Mkt F]

51
Q

Difference between monopoly and monopoly power

A

A ‘pure monopoly’ is where there is only one firm in the market, the monopoly is the industry.
Monopoly power is the output restricting and price setting ability which can be seen in oligopolies

52
Q

Natural monopoly

A

It is an industry where there is room for only one firm to fully exploit all of the available internal economies of scale. It is characterised by increasing returns to scale over very high levels of output.

53
Q

Draw a natural monopoly graph

A

AR and MR
LRAC more flat
LRMC more flat

54
Q

Features of a natural monopoly

A
  • only one firm can fully exploit all EoS
55
Q

What is price discrimination

A

Some buyers in the market are willing and able to pay a higher price for a product than others. Firms respond to this by charging a different price for the same goods or service in different markets.

56
Q

Bases of price discrimination

A

Age
Gender
Time
Income
Geographical distance

57
Q

Degrees of price discrimination

A

First-degree: where the firm charges each consumer the maximum price he or she is prepared to pay for each unit (haggling in bazaar)
Second-degree: according to how much they purchase. may charge higher for first units and gets cheaper over more units
Third-degree: consumers are grouped into 2 or more independent markets, which are charged different prices

58
Q

Conditions of price discrimination

A

PED of buyers must differ
Firms must be able to distinguish between consumers (split the market)
Must be able to keep the markets separate at relatively low cost (prevent arbitrage)
Must possess some monopoly power

59
Q

Drawing price discrimination graph

A

Draw 3 side-by-side graphs
One very inelastic market
One very elastic market
One combined market [kinked to show different PEDs]
label as fig 1,2,3
make sure inelastic has greatest profit
combined snp needs to be lower than the other two together
price of elastic needs to be lower than combined
price of inelastic needs to be higher than both

60
Q

Explain PD graphs using a cinema example

A

inelastic: Adults have an inelastic PED as the price of a ticket will take up a lower proportion of their income. As a result, the firm can identify this and using 3rd degree price discrimination they will increase the Price. Demand will fall, but less than proportionately. Revenue will increase and they will make an SNP of ….

Elastic: teens have an elastic PED as the price of a ticket will take up a greater proportion of their income. As a result, the firm can identify this and using 3rd degree price discrimination they will decrease the Price. Revenue will increase and they will make an SNP of ….

Combined: If they don’t separate the market segment, and isntead charge one price for everyone, they will generate less SNP. The curves are kicked to show the combined elasticities of consumers

61
Q

2 Monopsony conditions

A
  1. either one buyer in the market or one buyer exhibiting monopsony power (buys significant proportion of sales in the market)
  2. sellers in the market must not be able to sell their product to other firms outside of the market
62
Q

Characteristics of a monopsony

A

Only one buyer in the market (dominant buyer)
Few “pure” monopsonies in the UK but there are many examples of one buyer having monopsony power and dominating the market
A firm with monopsony power can exploit their bargaining power with the supplier to negotiate lower prices
The reduced costs to the firm buying purchasing inputs increases profit margins

63
Q

Characteristic of a contestable market

A

Low barriers to entry/exit
(low/no sunk costs)
New entrants exist
New entrants have perfect information
Consumers are willing and able to switch to new entrants

64
Q

Types of contestability

A

Low contestability: high barriers to entry
High contestability: low barriers to entry
More contestable: low barriers to entry
less contestable: high barriers to entry

65
Q

What will happen if the market becomes increasingly contestable

A

There are low barriers to entry
Therefore new entrants will enter the firm
Meaning the supernormal profit of incumbent firms will be competed away

66
Q

Explain why a monopoly is likely to be allocatively inefficient

A

[monopoly diagram/ show AE point]
A firm is likely to allocatively efficient where their cost of production equals the price that consumers are willing and able to pay. A monopoly is likely to be ineficient, as their output is restricted and prices are artificially high at the profit maximising point where MC=MR. The allocatively efficient would be at a higher quantity of Qae Pae

67
Q

Explain why a firm in monopolistic competition is unlikely to be dynamically efficient in the long run

A

[monopolistic LR - normal profit]
A firm in the monopolistic competition is unlikely to be dynamically efficient in the long run because they cannot earn supernormal profits in the long run. In long run MC, firms earn normal profit where P=C. Meaning they cannot reinvest retained profits for innovation.

Microeconomics (10 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions