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Econ > 3.4 > Flashcards

3.4 Flashcards

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1
Q

What is allocative efficiency?

A

Resources are used to produce the goods and services that consumers want.

MC=AR

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2
Q

What is productive efficiency?

A

Firms produce at the lowest point on the AC curve.

MC=AC

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3
Q

What is dynamic efficiency?

A

Resources are allocated efficiently over time, leading to a fall in LRAC.

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4
Q

What are some evaluations for dynamic efficiency?

A
  1. Time lag between investment and fall in LRAC.
  2. Factors change in the long run.
  3. Firms can face trade-offs between dividends and investments.
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5
Q

What is X-inefficiency?

A

Firms produce within the AC boundary, often due to monopolies with little incentive to lower costs.

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6
Q

What are the characteristics of perfect competition?

A
  1. Price takers.
  2. Homogenous products.
  3. No barriers to entry/exit.
  4. Many buyers and sellers.
  5. Perfect knowledge.
  6. Firms are SR pmaxers.
  7. Factors of production are perfectly mobile.
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7
Q

What are the advantages of perfect competition?

A

-Allocative efficiency in LR. -Productive efficiency.
-Supernormal profits in SR may increase dynamic efficiency through investment.

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8
Q

What are the disadvantages of perfect competition?

A

-Limited abnormal profits may prevent dynamic efficiency in LR.
-Small firms may have fewer or no EOS.
-Doesn’t apply to real life.

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9
Q

What are the characteristics of monopolistic competition?

A
  1. Imperfect competition.
  2. SR pmaxers.
  3. Sell non-homogenous goods with close substitutes so some differentiation
  4. Large number of small, independent buyers and sellers.
  5. Low barriers to entry/exit.
  6. Imperfect information.
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10
Q

Why do monopolistic firms make normal profits in LR?

A
  • New firms enter because of profit incentive = makes demand for firms already operating more elastic = shifts AR to left = normal profit
    > Firms can try to differentiate nad innovate to stay in SR and make abnormal profits
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11
Q

What are the advantages of monopolistic competition?

A
  1. Consumers get a variety of choice.
  2. More realistic than perfect competition.
  3. SR abnormal profits may lead to dynamic efficiency through investment.
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12
Q

What are the disadvantages of monopolistic competition?

A
  • In LR dynamic efficiency is limited due to lack of supernormal profits
  • Not allocative, dynamic or productively efficient
  • Firms are not as efficient as those in perfect comp= have x-inefficinecy as little incentive to minimise cost
  • Firms waste resources on non-price comp such as branding and advertising
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13
Q

What is an oligopoly?

A

A market dominated by a few firms that act independently.

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14
Q

What are the characteristics of oligopoly?

A
  1. High barriers to entry/exit.
  2. High concentration ratio.
  3. Interdependence of firms.
  4. Product differentiation.
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15
Q

What is collusive behaviour?

A

when firms make collective agreements to work together and reduce competition
>causes higher prices for consumers, reduces consumer surplus and increases abnormal profits for producers

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16
Q

What are the reasons for collusive behaviour?

A
  1. Increase abnormal profit.
  2. Maximize own benefit by restricting output.
  3. Ineffective competition policy.
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17
Q

What are the costs of collusion?

A
  • Loss of consumer welfare due to increased prices and decreased output
  • Absence of competiton = decreases efficeny and increases AC of production
  • Reinforces monopoly power and increases barriers to entry
  • Lower quantity supplied= reduces allocative efficnecy
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18
Q

What are the benefits of collusion?

A
  • Increases industry standards as firms can collaborate on tech and improve it
  • Dynamic efficnecy due to increased profits
  • Saves firms duplicate research and development
  • Increased size= EOS= lower prices
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19
Q

What is overt collusion?

A

A formal agreement made between firms, such as cartels.

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20
Q

What is tacit collusion?

A

No formal agreement, but collusion still implies, such as in supermarket price wars.

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21
Q

What is a cartel?

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A

group of 2 or more firms which agree to control prices/limit ouput/prevent new entrance to market eg OPEC oil

> higher prices for consumers and low output

22
Q

What is price leadership?

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A

when a firm changes their prices and others follow
>others follow to prevent price wars and reduce risk of losing market share

23
Q

What are the types of price competition?

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A
  • Price wars- firms constantly cutting prices below competition
  • Predatory pricing- firms setting low prices to drive competiton out of industry. In SR it makes losses and its illegal
  • Limit pricing- lowering prices to discourage new entry of firms- pricing below what a new entrant is able to price at meaning firms make lower profit
    > however lower profti of existing firm= dissatisfy shareholders due to lower dividens
24
Q

What are the types of non-pricing competition?

Study These Flashcards
A
  • Branding= increase loyalty = repeat purchase due to trust
  • Quality= able to charge higher prices and good reputation
  • Advertising= increases awareness of product
  • Customer service= loyalty
  • Product development = comp adv of rivals as relaase product first = increases sales and reputation
  • Loyalty cards- encourages customers to return as they get rewards
25
What is a pure monopoly?
Single seller in the market
26
What is a legal monopoly?
A firm that holds more than 25% of the market.
27
What are the characteristics of a monopoly?
1. Price discrimination. 2. Price makers. 3. High barriers to entry and exit. 4. Profit maximiser in SR and LR
28
What factors can influence monopoly power?
- Barriers to entry - Number of competitors - Advertising = increases customer loyalty= makes demand price inelastic=barrier to entry - Degree of product differentiation- more unique product= easier to gain market share= less comp faces
29
What is third degree price discrimination?
When a monopolist charges different prices to different groups for the same good/service.
30
What are the benefits of price discrimination for consumers?
- Cross subsidisation allows offpeak to revieve lower prices= gain net welfare - Increase equality as offpeak allows them to access good/service
31
What are the benefits of price discrimination for producers?
- Increased profit= investment= dynamic efficiency - High profits allow to cross subsidise markets doing bad= prevents failure and job losses
32
What are the costs of price discrimination for consumers?
- Loss in consumer surplus due to higher prices= loss of allocative efficiency - Strengthens monopoly power of firms= may lead to higher prices in the future for conumers
33
What are the costs of price discrimination for producers?
If used a predatory pricing technique it can lead to investigation from CMA - Costs firms to divide market = limited benefits
34
What are the benefits of monopolies?
- High abnormal profits = investment in R+D= dynamiclly efficnent in LR - Monopolies can generate export revenue - Economies of scale= lower AC= lower prices - High profits= increased gov revenue due to taxation - Employees may recieve higher wages due to x-inefficnet employees
35
What are the costs of monopolies?
- Misallocation of resources due to higher prices=market failure - Exploit customers by charging higher price= underconsumption of goods= consumer needs and wants not met= market failure - No incentive to become effiecint due to low comp so high productions costs= not productively efficient - Less choice that compettive market - Loss in consumer surplus and gain in consumer surplus due to price rise - not allocatively effiect
36
What is a natural monopoly?
when economies of scale are so large that not even a single producer is able to fully exploit all of them
37
What are the characteristics of a natural monopoly?
- Huge fixed costs - Huge start up costs - Very high EOS - Rational for 1 firm to operate
38
What is a monopsony?
Single buyer in market
39
What are the characteristics of a monopsony?
- Able to negotiate low prices - Able to set market prices - Assumed they are pmaxers
40
What are the benefits of a monopsony?
- Lower prices for consumers potentially due to low cost - Monopsonists pay higher wages due to higher profits - Achiever purchasing economies of scale = low cost = higher profits - Monopsony gains increased profits due to low cost = investment= more fore shareholders
41
What are the costs of a monopsony?
- Fall in quality due to prices forced down - Suppliers recive lower profit= some leave market - Reduced wages for workers of suppliers = reduce productivity, monopsony may also lower wages to maximise profits
42
Characteristics of contestable market
- High consumer sovriegnty - Perfect knowledge - Freedom of entry and exit - Entrants to contestable markets have access to production techniques and new technology = AC curve is same as existing firms
43
Implications of contestable markets
- Firms are allocatively and productively efficient. They produce at lowest point on AC curve if not then new entrants can undercut them. - Firms enter if they see comp make profit, the stay until comp prevents them from making a profit. This can take way profit from incumbent firms and force them out of business. This can be prevented using limit pricing
44
Barrier to exit definition
any obstacle that prevents a firm from leaving the market
45
Types of barriers to exit
- Undervaluation of assets - High redundacy costs - Penalties for leaving contracts too early - Sunk costs to high
46
What is a sunk cost
fixed cost a firm cant recover if it leaves the market eg machinery and advertisng
47
Barrier to entry definition
any obstance that prevents a new firm entering the market
48
Legal barriers
-patents -licences/permits -red tape -insurance
49
Technical barriers
start up costs -sunk costs -high EOS -natural monopoly
50
Strategic barriers
-predatory pricing -limit pricing -heavy advertising= brand loyalty

Econ (41 decks)

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