3.4- market structures

Question 1

allocative efficiency

Answer 1

-when resources are used to produce goods and services which consumers want and value most highly
-social welfare maximised
-where value to society from consumption is equal to marginal cost of production
-where P=MC

Question 2

productive efficiency

Answer 2

-when products are produced at lowest avg cost
-min resources to produce max output
-only exists at bottom of AC curve
-where MC=AC in sr
-only possible if firm is technically efficient

Question 3

dynamic efficiency

Answer 3

-when resources are allocated efficiently over time
-alternative is static efficiency which only occurs at a set point in time
-achieved where competition encourages innovation
-supernormal profits required to give firms incentive to invest and ability to do so

Question 4

X-inefficiency

Answer 4

-firm fails to minimise avg costs at a given level of output
-organisational slack
-often occurs in lack of competition where firms have no incentive to cut costs

Question 5

characteristics of perfect competition

Answer 5

-many buyers and sellers so no one person can massively influence market
-freedom of entry and exit so only normal profits in the LR
-perfect knowledge
-homogeneous products
-price takers

Question 6

perfect comp- profit max equilibrium in the sr

Answer 6

-firms short run profit maximise and so produce where MC=MR
-they can also make a loss or normal profits

Question 7

perfect comp- profit max equilibrium in the LR

Answer 7

-firms can only make normal prof in the long run
-as there is perfect knowledge and no barriers so new entrants

Question 8

perfect competition- efficiency

Answer 8

-they are productively efficient as they produce where MC=AC
-allocative efficient as they prod where P=MC, static efficient
-not dynamic efficient as perfect info means one firms invention is adopted by another
-unable to benefit from EoS

Question 9

characteristics of monopolistic competition

Answer 9

-large number of buyers and sellers
-no barriers to entry or exit
-firms produce differentiated non-homogeneous products meaning individual firms have some price setting power, so curve is downward sloping

Question 10

monopolistic comp- profit maximising equilibrium in SR

Answer 10

-supernormal or normal profits or losses can be mad in SR
-produce where MC=MR

Question 11

monopolistic comp- profit maximising equilibrium in LR

Answer 11

-due to lack of barriers firms can only make normal profits in the LR
-new entrants common

Question 12

monopolistic competition- efficiency

Answer 12

-not allocatively or productively efficient as MR does not equal AR so AC cannot equal MC and AC cannot equal AR
-dynamically efficient as there are differentiated products so innovation will give edge over competitors to make SR supernormal prof
-less is sold at higher price compared to perf, however there is greater variety to some EoS can be enjoyed

Question 13

characteristics of oligopoly

Answer 13

-few firms dominate and have majority of market share
-differentiated products
-concentrated supply in hands of relatively few firms meaning high conc ratio
-firms are interdependent
-barriers to entry

Question 14

oligopoly- N-firm concentration ratios

Answer 14

-measures percentage of total market that a particular number of firms have
-total sales of n firms\total market size multiplied by 100

Question 15

what is collusive behaviour?

Answer 15

-firms make collective agreements to reduce competition, when firms don’t collude they are in a competitive oligopoly

Question 16

reasons for collusive behaviour

Answer 16

-maximise industry profits
-reduces uncertainty
-works best when there are few firms all well known to each other

Question 17

reasons for non-collusive behaviour

Answer 17

-it is illegal
-risks such as one firm breaking cartel or price being set where they do not want it
-may have a strong business model or something that sets them apart meaning they can already charge higher prices

Question 18

what happens in a collusive oligopoly?

Answer 18

-may agree on prices, market share or advertising expenditure
-overt is formal agreement whilst tactic is non formal
-formal is called a cartel, laid out in document may be fines for firms who break rules

Question 19

types of collusion

Answer 19

1.price leadership- one firm has advantages due to size or costs and becomes the dominant firm others will tend to follow so dominant firm decides price
2.barometric firm price leadership- firm develops a reputation for being good at predicting next moves, so others follow
3.- unwritten rules about advertising and trying not to take each others customers

Question 20

game theory

Answer 20

-used to examine best strategy a firm can adopt for each assumption about its rivals
-explores reaction of one player to changes in strategy by another

Question 21

types of price competition- price wars

Answer 21

-where non price competition is weak
-when it is difficult to collude
-drives prices down to levels where firms are frequently making losses
-lowers industry profits

Question 22

types of price competition-predatory pricing

Answer 22

-occurs when established firm is threatened by new entrant
-established firm sets low price to drive new firms out of market, then put prices back up
-this is illegal

Question 23

types of price competition-limit pricing

Answer 23

-used to prevent new entrants
-firms set low prices to at least make normal profits
-mainly used in contestable markets

Question 24

types of non price competition

Answer 24

-advertising
-loyalty cards
-branding
-quality
-customer service
-product development

Question 25

efficiency of oligopolistic firms

Answer 25

-firms are statically efficient but not productively or allocatively efficient -dynamically efficient -can exploit Eos

Question 26

characteristics of monopoly

Answer 26

pure=one sole seller of good in a market -more than 25% market share -short run profit max -high entry barriers -

Question 27

monopoly profit max equilibrium SR and LR

Answer 27

-able to make supernormal prof or loss in the SR and LR as there is no freedom of entry and exit -

Question 28

monopoly- third degree price discrimination

Answer 28

-charge diff prices to diff people for same goods and services -e.g. diff times of day, diff areas or diff people such as students -firm must be able to clearly separate market into groups with diff elasticities of demand

Question 29

cost and benefits of price discrimination

Answer 29

-firms able to increase profits -those in elastic market gain as they get lower prices, increased equality -consumers may lose some con surplus as they have to pay higher prices

Question 30

natural monooly

Answer 30

-EoS are so large that a single firm cannot exploit them all -e.g. national grid and royal mail -found in industries with very high fixed costs such as railways

Question 31

costs and benefits of monopolies to firms

Answer 31

-huge profits -investment -compete against large overseas organisations -lack of comp means they may not be making max profits

Question 32

costs and benefits of monopolies to employees

Answer 32

-fewer workers -inefficiency means they likely receive higher wages

Question 33

costs and benefits of monopolies to suppliers

Answer 33

-may reduce their profits if all supply is bought as monopoly will reduce prices

Question 34

costs and benefits of monopolies to consumers

Answer 34

-better if there is competition -firms that enjot Eos will be more efficient giving consumers high surplus -inc range of goods -higher prices for worse service due to lack of comp -less choice

Question 35

characteristics of monopsony

Answer 35

-one single buyer -e.g. NHS -pay suppliers the lowest possible price

Question 36

costs and benefits of monopsony to firms

Answer 36

-higher profits as they can buy at lower prices -purchasing economies of scale

Question 37

costs and benefits of monopsony to consumers

Answer 37

-may gain from lower prices as reduced costs passed down -could cause a fall in supply -fall in quality as prices are driven down

Question 38

costs and benefits of monopsony to employees

Answer 38

-pay higher wages as they make higher profits -

Question 39

costs and benefits of monopsony to suppliers

Answer 39

receive lower prices

Question 40

characteristics of a contestable market

Answer 40

-perfect knowledge -freedom of entry and exit -relative absence of sunken costs -Firms will be able to and have the legal right to use the best available technology, -low product loyalty -SR profit maximisers do not collude

Question 41

implications of a contestable market

Answer 41

-firms enter if they see others making profit until competition prevents them from making a profit, this may be prevented by limit pricing -firms only make norm profits -likely to have productive and allocative efficiency

Question 42

types of barriers to entry and exit-

Answer 42

-legal barriers -marketing barriers, new firms unlikely to have funds for this -pricing decisions of existing firms e.g. limit pricing -EoS -sunken costs such as writing off assets and redundancies

Question 43

sunken costs

Answer 43

- a fixed costs the business cannot recover if it leaves the industry -all businesses have sunk costs as things re sell for lower prices

Question 44

degree of contestability

Answer 44

-measured by the extent to which the gains from market entry for a firm exceed the costs of entering the market -no market in reality is perfectly contestable -more contestable the market is, the more unstable