Competitive Markets Flashcards
What are the pros of competitive markets?
Allocative efficiency. Firms will charge at P=MC, so resources follow consumer demand.
Productive efficiency. Firms must lower costs and exploit EoS so they can have lower prices. This is key in being competitive.
X-efficiency. Firms must minimise waste and produce on their AC.
Job creation. Due to higher quantities, more labour will be needed to fulfill this quantity.
What are the cons of competitive markets?
Lack of dynamic efficiency. Theres no SNP so firms cant invest. Therefore theres barely any progress in tech and innovation. Consumers may lose out from the benefits of DE.
Lack of EoS. Even if they are PE, theres a lack of EoS sinces the market has many small firms. Monopolies exploit EoS at a greater level although being PI.
Cost cutting in dangerous areas. Firms may cut cost in areas like health and safety. This is undesireable.
Creative destruction. In these markets theres a lot of entrants who come with innovative/new things and ideas. This can destroy pre-existing firms, leading to jobs being lost.
Evaluation of competitive markets?
Firms may still be DE.
DE may be part of competition.
Level of EoS. If the level of EoS is very low then maybe competitive markets are less desirable. Consumers may be better off with monopolies.
Areas where cost cutting occurs. If its in areas not dangerous then its fine.
There may still be a need for regulation to protect from cost cutting in dangerous areas.
Static vs DE. What does society want more. If its static then competitive markets are the best.
However, it may depend on the type of good/service. If its necessities then static is desirable. For differentiated goods/services, maybe DE is more desireable.
