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Economics Theme 3 > 3.4 > Flashcards

3.4 Flashcards

1
Q

Explain allocative efficiency

A

Where P=MC
Consumer welfare is maximised.
At the extreme the costs to produce is what it is sold at\

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2
Q

Explain productive efficiency

A

Where firm is operating at the lowest of their AC curve

Producing the most they can with the resources

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3
Q

Explain dynamic efficiency

A

Technology improvements over time, increases productive potential

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4
Q

Explain X-inefficiency

A

Lack of competition causes an increase in costs

Often from complacency and laziness

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5
Q

What are the characteristics of perfect competition

A

Lots of small firms
Homogenous goods
Price takers
Low barriers to entry/ exit

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6
Q

In the SR what efficiencies does perfect competition have

A

AE

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7
Q

In the long run what efficiencies does perfect competition have

A

PE

AE

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8
Q

Explain the characteristics of monopolistic competition.

A

Differentiated products
Profit max
low barriers to entry/ exit
lots of small firms

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9
Q

What are the efficiencies of monopolistic competition in the SR

A

Non

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10
Q

What are the efficiencies of monopolistic competition in the LR

A

Non

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11
Q

Explain the characteristics of an oligopoly market

A

Few firms in the market
High barriers to entry/ exit
Profit maximisation
Firms are independent upon each other

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12
Q

What is a concentration ratio

A

Measures the proportion of the market dominated by the larger firms

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13
Q

What is common oligopoly criteria

A

Where five or fewer firms control 50% of the market

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14
Q

What is the difference between tacit and overt collusion

A

Tacit -> Quiet/ Unspoken implicit understanding between business -> no evidence, so hard to prove -> illegal

Overt -> Open collusion -> Firms send messages to anot
her firm about its prices etc -> it is illegal

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15
Q

Why do firms collude

A

Leads to a lower consumer surplus-> higher prices -> higher profit
Avoid price competition -> avoids marketing costs

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16
Q

Why do firms break collusive agreements

A

Whistle blowers -> avoid fines etc

17
Q

What does a kinked demand curve show

Draw it

A

If firms raise prices above p, then consumers will switch away, as rivals will keep prices at the same level

If firms drop prices below p, then rivals will have to follow causing a price war

Overall they should just stay at p

18
Q

What is the outcome of a price war

A

Both firms make less profit

19
Q

Explain predatory pricing

A

Drop price below your AC , to kill of existing competition
Make a SR loss -> but pushes firms out of the market
Can then increase increase price as there’s no competition

20
Q

Whats an evaluation of predatory pricing

A

illegal

Fines , criminal prosecution

21
Q

What is limit pricing

A

Prevent new firms entering, set P below there potential AC

Creates a barrier to entry

22
Q

What is an evaluation of limit pricing

A

Wouldn’t work against conglomerates, already have EofS.

So would need to know there AC

23
Q

Explain the characteristics of a monopoly

A

1 dominant firm in the market
High barriers to entry / exit
Profit maximisation

24
Q

How does monopoly market affect efficiencies

A

neither AE or PE

Suffer from X- inefficiency

25
Q

Define price discrimination

A

When a firm sells the same product in different markets with differing elasticities at different prices

26
Q

What are the advantages of monopoly power

A
  1. Economies of scale
    - > risk bearing
    - > managerial
    - > financial
    - > advertising
    - > technical
  2. Greater funds for R&D and investment
27
Q

What are the disadvantages of having monopoly power

A
  1. Diseconomies of scale -> x-inefficinecy
  2. Productive / Allocative efficiency
  3. Can exploit consumers
  4. No DE
28
Q

What is a natural monopoly

A

Exists when it only makes sense for 1 firm to dominate the market
Typical of a market with high sunk costs/ requires large output to exploit economies of scale
-> examples include BT

29
Q

What is a monopsony

A

When there is 1 sole buyer in the market

30
Q

Example of monopsonies

A

Gov is a sole buyer of defence equipment in the UK

31
Q

How do monopsonies exploit their power

A

Have a massive buying power -> can reduce producer surplus -> can drive down prices

32
Q

Benefits that come from a monopsony power

A
  1. Lower prices passed on to consumers in SR

2. Can balance out monopoly power

33
Q

Drawbacks of monopsony power

A
  1. Producers can be exploited
  2. Cheaper price for consumer at the expense of producer
  3. LR suppliers leave the market , price increases
34
Q

How can producers protect themselves from consumers

A
  1. Form a union, collective bargaining against monopsony
  2. Fairtrade schemes
  3. Leave the market
  4. Diversify
35
Q

What is a contestable market

A

Where there are low sunk costs and therefore low barriers to entry.
Allows for ‘hit and run’ profits when the market is attractive

36
Q

What makes markets not contestable

A

Non price competition
Monopolies controlling the price e
High brand image / patents
High fixed costs

Economics Theme 3 (4 decks)

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