3.4 Market Structures Flashcards

1
Q

What is allocative efficiency?

A

When AR=MC, where resources are allocated so that consumers get the maximum benefit

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2
Q

What is productive efficiency?

A

When MC=AC, Where average costs are minimised

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3
Q

What is dynamic efficiency?

A

Long-term efficiency as a result of innovation and reinvested profits

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4
Q

What is X-inefficiency?

A

Occurs when the firm lacks the incentive to control production costs. AC is higher than it should be

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5
Q

Perfect competition?

A

A market structure where individual firms have no market power due to the amount of competition and can’t influence price

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6
Q

Imperfect competition?

A

Market structures where firms do have some market power and can influence prices

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7
Q

What does imperfect competition include?

A
  • Monopolistic competition
  • Oligopoly
  • Monopoly
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8
Q

Characteristics of perfect competition?

A
  1. Many buyers and sellers
  2. There are no barriers to entry and exit
  3. Buyers and seller possess perfect knowledge of prices
  4. The products are homogeneous
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9
Q

What is monopolistic competition?

A

A market structure in which there are many firms offering a similar product but with some product differentiation

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10
Q

What are the characteristics of monopolistic markets?

A
  1. Large number of small firms
  2. Low barriers to entry/ exit
  3. Products are slightly differentiated
  4. Low degree of market power & some price setting power
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11
Q

What happens to profit in the long run for monopolistic competition?

A

In the long run profits will return to equilibrium where they make normal profit because they can’t defend against new competitors who enter the market

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12
Q

What is an oligopoly?

A

A market structure in which a few large firms dominate the industry with each firm having significant power

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13
Q

What are the characteristics of an oligopoly?

A
  1. High barriers to entry/exit
  2. High concentration ratio
  3. Interdependence of firms
  4. Product differentiation
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14
Q

What are the reasons for collusion?

A
  1. Few competitiors
  2. Similar costs
  3. Similar revenue
  4. High barriers to entry
  5. Ineffective regulation
  6. Brand loyalty
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15
Q

What is overt collusion?

A

Overt collusion occurs when firms explicitly agree to limit competition or raise prices

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16
Q

What is tacit collusion?

A

Tacit collusion occurs when firms avoid formal agreements but closely monitor each others behaviour usually following the lead of the largest firm in the industry

17
Q

What is game theory?

A

Game theory is a mathematical framework which is used by firms to ensure optimal decisions are made in a strategic setting where there is a high level of interdependence

18
Q

What are price wars?

A

Price wars occur when competitors repeatedly lower prices to undercut each other in an attempt to increase market share

19
Q

What are some examples of price competition?

A
  1. Price wars
  2. Predatory pricing
  3. Limit pricing
20
Q

What is predatory pricing?

A

Predatory pricing is the practice of lowering prices when a new competitor joins the industry in order to drive them out

21
Q

What is limit pricing?

A

Limit pricing is when firms set a limit on how high the price will go in the industry

22
Q

What are some examples of non price competition?

A
  1. Loyalty cards
  2. Branding
  3. Packaging
  4. Celebrity endorsement
    Etc
23
Q

What is a monopoly?

A

A monopoly is a market structure in which there is a single seller

24
Q

What are the characteristics of a monopoly?

A
  1. No substitute products
  2. Firm has complete market power
  3. High barriers to entry exist
25
Q

How much market share does a firm need to have to be considered a monopoly?

A

More than 25%

26
Q

What is third degree price discrimination?

A

When a firm charges different prices to different consumers for the same good

27
Q

What conditions must be met for third degree price discrimination to occur?

A
  1. Market power
  2. Varying consumer PED
  3. Ability to prevent resale of tickets
28
Q

What is a monopsony?

A

A monopsony is where there is a single buyer in the market

29
Q

What are the characteristics of a monopsonist?

A
  1. Wage makers
  2. Profit maximisers
  3. Purchase large portion of the market supply
30
Q

What is a contestable market?

A

A contestable market occurs when there is freedom of entry into a market and where costs of exit are low

31
Q

What are the characteristics of a contestable market?

A
  1. No barriers to entry/exit
  2. No competitive disadvantages on entry
  3. Perfect information
  4. Hit and run competition
32
Q

What is hit and run competition?

A

Where short run SNP acts as a profit signalling mechanism and new firms easily enter the market, extract profit then leave

33
Q

What are the types of barriers to entry?

A
  1. Economies of scale
  2. Legal barriers
  3. Ownership of essential resources
  4. Anti competitive practices by competitors
34
Q

What is a sunk cost?

A

A sunk cost is an investment that has been made that cannot be recovered