Brainscape's Knowledge GenomeTM


Top Flashcards (Certified)
All Flashcards

Economics 2.0 > 3.4 Market Structures > Flashcards

3.4 Market Structures Flashcards

(97 cards)

Start Studying
1
Q

What is Allocative Efficiency?

A

Occurs when resources are allocated to produce the goods and services most desired by consumers.

Achieved when Price = Marginal Cost (P = MC). Maximises consumer utility; free markets are typically allocatively efficient.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What is Productive Efficiency?

A

When firms produce at the lowest possible cost.

Occurs at the lowest point on the Average Cost (AC) curve, where Marginal Cost = Average Cost (MC = AC). All points on a Production Possibility Frontier (PPF) are productively efficient.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What is Static Efficiency?

A

Includes allocative and productive efficiency, focusing on a single point in time.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What is Dynamic Efficiency?

A

Efficiency over time through innovation and investment.

Leads to falling long-run average costs and better products or processes. Affected by short-run factors such as demand, interest rates, and past profits. Depends on investment time lags, trade-offs (e.g., between shareholder dividends and reinvestment).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is X-Inefficiency?

A

When a firm operates within its average cost (AC) curve, indicating inefficiency.

Causes include poor management, organisational slack, and lack of competitive pressure. Common in monopolies, which lack incentive to cut costs due to absence of rivals.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What are the assumptions of perfect competition? (5)

A
  • Many buyers and sellers
  • Homogeneous products
  • Perfect knowledge
  • Freedom of entry and exit
  • Profit maximisation
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

In a perfectly competitive market, what is the role of buyers and sellers?

A

Each is a price taker with no market power

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What does it mean for products to be homogeneous in perfect competition?

A

All goods are identical; no brand loyalty

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What is meant by perfect knowledge in the context of perfect competition?

A

Buyers and sellers have full information about prices and products

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What does ‘freedom of entry and exit’ imply in a perfectly competitive market?

A

No barriers to enter or leave the market

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What is the profit maximisation condition for firms in perfect competition?

A

MC = MR

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What types of profits can firms make in the short-run equilibrium of perfect competition?

A
  • Abnormal (supernormal) profits
  • Normal profits
  • Losses
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

How is a firm characterized as a price taker in perfect competition?

A

The price is set by the market

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

When is profit maximised for a firm in a perfectly competitive market?

A

Where MC = MR

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What condition indicates that a firm can earn abnormal profit?

A

AR > AC

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What drives profits to normal levels in long-run equilibrium of perfect competition?

A

Freedom of entry and exit

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What happens when abnormal profits exist in a perfectly competitive market?

A

New firms enter, increasing supply and lowering price

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What occurs when losses happen in a perfectly competitive market?

A

Firms exit, reducing supply and raising price

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What is the long-run equilibrium condition in perfect competition?

A

AR = AC, and firms earn normal profits only

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What does it mean for a firm to be productively efficient in perfect competition?

A

Firms operate at the lowest point of their AC curve in the long run

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What indicates allocative efficiency in perfect competition?

A

P = MC, meaning consumer welfare is maximised

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

What does x-efficiency mean in a competitive market?

A

Competitive pressure keeps firms operating efficiently

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Why is perfect competition considered not dynamically efficient?

A

Lack of abnormal profit makes innovation and R&D unlikely

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

What are the assumptions of monopolistic competition? (5)

A
  • Many buyers and sellers
  • Product differentiation
  • Imperfect information
  • Low barriers to entry and exit
  • Firms aim to maximise profit (MC = MR).
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
What characterizes short-run equilibrium in monopolistic competition? (2)
* Firms can earn abnormal (supernormal) profit if AR > AC * Differentiation gives firms some price-making power.
26
What happens in long-run equilibrium in monopolistic competition?
New firms enter if firms make abnormal profits, reducing AR until only normal profit is earned (AR = AC). Long-run equilibrium occurs where MC = MR and AR = AC.
27
Is monopolistic competition productively efficient?
No, firms don’t operate at the lowest point of the AC curve.
28
Is monopolistic competition allocatively efficient?
No, P > MC, meaning consumer welfare is not maximised.
29
What is X-inefficiency in monopolistic competition?
X-inefficiency can arise due to lack of strong competition in the short run.
30
What is the dynamic efficiency in monopolistic competition?
Some dynamic efficiency exists as firms have an incentive to innovate due to product differentiation, but it is limited by low profits in the long run.
31
What are the assumptions of oligopoly? (5)
* Few dominant firms: A small number of large firms hold a high market share. * Interdependence: Firms take into account competitors’ potential reactions when making decisions. * High barriers to entry: Includes economies of scale, brand loyalty, patents, or legal restrictions. * Product differentiation: Products may be similar (homogeneous) or branded/differentiated. * Profit maximisation: Firms produce where MC = MR to maximise profits.
32
What is game theory in the context of oligopoly?
Game theory is used to model strategic behaviour in interdependent markets.
33
What is Nash Equilibrium?
A stable outcome where no firm benefits from changing its strategy unilaterally.
34
What does the kinked demand curve model explain?
It explains price rigidity in oligopolies: - Price increases: Rivals likely don’t follow, leading to large loss in market share (elastic demand). - Price cuts: Rivals match the cut, causing minimal gain but lower profits (inelastic demand).
35
What is collusion in oligopoly?
Collusion involves cooperation among firms to maximise joint profits or reduce uncertainty.
36
What are the types of collusion?
* Overt collusion: Formal agreements (e.g. cartels like OPEC). * Tacit collusion: Informal coordination (e.g. price leadership, where one firm sets price and others follow).
37
What are the effects of collusion? (2)
* Higher prices * Lower output
38
What is non-collusive behaviour in oligopoly?
Firms may compete aggressively in the absence of collusion.
39
What are the types of price competition? (3)
* Price wars: Firms continually lower prices to undercut rivals. * Predatory pricing: Temporarily cutting prices to force rivals out (can be illegal). * Penetration pricing: Setting a low price to gain market share, then increasing it later.
40
What are the types of non-price competition? (5)
* Advertising and branding: Building customer loyalty and brand identity. * Product quality and design: Enhancing features, materials, or usability. * Customer service: Offering better support or added services. * Loyalty schemes: Encouraging repeat purchases through points, discounts, etc. * Packaging and innovation: Making products more attractive or functional.
41
What is productive inefficiency in oligopoly?
Firms often don’t produce at minimum AC due to lack of full competitive pressure.
42
What is allocative inefficiency in oligopoly?
P > MC, meaning resources are not allocated to maximise consumer welfare.
43
What is dynamic efficiency in oligopoly?
Often high, as firms reinvest abnormal profits into R&D, innovation, and branding to maintain competitive edge.
44
What is a monopoly?
A monopoly is a market structure with one dominant firm supplying the entire or majority of the market.
45
What is a pure monopoly?
A pure monopoly is a market with a single seller, no close substitutes, and very high barriers to entry.
46
What are firms in a monopoly considered?
Firms are price makers; they can influence the market price due to lack of competition.
47
How is profit maximisation achieved in a monopoly?
Profit maximisation occurs where MR = MC.
48
What are legal barriers to monopoly power? (3)
* Patents * Copyrights * Licenses.
49
What leads to natural monopolies?
Economies of scale lead to natural monopolies where high fixed costs make single-firm supply most efficient.
50
How does brand loyalty affect monopolies?
Brand loyalty and advertising can deter new entrants into the market.
51
What is meant by control over essential resources in monopoly power?
Control over essential resources refers to having access to rare raw materials or distribution networks.
52
How does technological superiority contribute to monopoly power?
Technological superiority allows a firm to have better production techniques, establishing dominance.
53
What characterizes the demand curve for monopolists?
Monopolists face a downward-sloping demand curve; to sell more, they must lower the price.
54
What is price discrimination?
Price discrimination is charging different prices to different consumers for the same product based on willingness to pay.
55
How does elasticity of demand affect monopolists?
Elasticity of demand affects a monopolist’s ability to raise prices without losing significant sales.
56
What is first-degree price discrimination?
First-degree price discrimination is charging the maximum price each consumer is willing to pay.
57
What is second-degree price discrimination?
Second-degree price discrimination varies the price by quantity consumed, such as bulk discounts.
58
What is third-degree price discrimination?
Third-degree price discrimination involves different prices for different consumer groups, like student or senior discounts.
59
What conditions are required for price discrimination? (3)
* Monopoly power * Ability to segment the market * Prevention of resale between consumers.
60
What is productive inefficiency in a monopoly?
Productive inefficiency occurs when a firm does not produce at minimum average cost (AC).
61
What is allocative inefficiency in a monopoly?
Allocative inefficiency occurs when price (P) is greater than marginal cost (MC), meaning consumer needs are not optimally met.
62
What is dynamic efficiency in a monopoly?
Dynamic efficiency can be high due to abnormal profits funding innovation and R&D.
63
What are the costs of monopoly? (4)
* Higher prices * Lower output than competitive markets * Limited consumer choice * Inefficient allocation of resources.
64
What are the benefits of monopoly? (3)
* Economies of scale lowering long-run costs * Dynamic efficiency from innovation * Potential funding for public services if regulated
65
What is a natural monopoly?
A natural monopoly occurs when economies of scale are so extensive that a single firm can supply the entire market more efficiently than multiple firms.
66
Where are natural monopolies often found?
Natural monopolies are often found in utilities, such as water and gas.
67
What is the cost behavior in a natural monopoly?
In a natural monopoly, marginal cost is constant or falling, while average cost continues to fall as output increases.
68
Why is regulation needed in a natural monopoly?
Regulation may be needed to avoid abuse of market power and ensure fair pricing.
69
What is a monopsony?
A monopsony is a market with a single dominant buyer of a good or service.
70
What power does a monopsonist have?
The firm has buying power, enabling it to influence the price it pays suppliers.
71
Give a common example of monopsony.
The government as the main buyer of healthcare services in the NHS.
72
What is an assumption of monopsony regarding buyers?
Only one buyer exists in the market.
73
What is an assumption of monopsony regarding sellers?
Many small sellers or suppliers.
74
What are the goals of a monopsonist?
The buyer aims to minimise costs and maximise profit.
75
How does monopsony affect local labour markets?
A single large employer dominates the local labour market.
76
How does a monopsonist set wages?
The employer sets wages below the competitive level because it has power over the wage rate.
77
Where does equilibrium occur in a monopsony?
Equilibrium occurs where MC of employing labour = MRP, not where wage = MRP as in perfect competition.
78
What are the outcomes of monopsony in terms of wages and employment?
Results in lower wages and less employment compared to competitive labour markets.
79
What is an advantage of monopsony power?
Lower input costs for the monopsonist (e.g., lower wages, cheaper raw materials).
80
How can monopsony affect consumer prices?
Can lead to lower prices for consumers if cost savings are passed on.
81
What is a potential benefit of monopsony regarding investment?
May increase investment and efficiency due to higher profits.
82
What is a disadvantage of monopsony for suppliers?
Suppliers may receive unfairly low prices, affecting their profitability and survival.
83
What is a disadvantage of monopsony for workers?
Workers may face lower wages and worse conditions due to lack of bargaining power.
84
What inefficiency can monopsony lead to?
Can lead to allocative inefficiency (resources not used where they are most valued).
85
What long-term effect can monopsony have on supply?
Reduced supply in the long run, as suppliers exit the market.
86
What factors determine the impact of monopsony?
Impact depends on how much power the monopsonist has.
87
What can be done to mitigate the negative effects of monopsony in labour markets?
Regulation or minimum wage laws can reduce the negative effects.
88
Can monopsony have benefits?
In some cases, monopsony can be beneficial if cost savings benefit wider society (e.g., lower taxes or better public services).
89
What is a contestable market?
A market where barriers to entry and exit are low, allowing potential competition to discipline existing firms. ## Footnote This means that even with few firms or a monopoly, the threat of new entrants can force firms to behave competitively.
90
What is the effect of market contestability on prices and outputs?
The more contestable the market, the closer prices and outputs will be to competitive levels. ## Footnote This reflects the influence of potential competition on existing firms' pricing strategies.
91
What are the key features of contestable markets?
* Low sunk costs * No significant barriers to entry or exit * Access to the same technology and production methods * No brand loyalty or anti-competitive practices * Hit and run competition ## Footnote These features facilitate entry and exit, enhancing competition.
92
Define sunk costs in the context of contestable markets.
Costs that cannot be recovered once spent, such as specialist equipment and advertising. ## Footnote High sunk costs can deter entry into the market.
93
How do sunk costs affect market contestability?
High sunk costs make markets less contestable by increasing the risk of entry. ## Footnote Conversely, low sunk costs encourage temporary competition.
94
What behavior do firms exhibit in a contestable market?
Firms behave as if in a competitive market, keeping prices near productive efficiency and avoiding exploiting monopoly power. ## Footnote This behavior helps deter new entrants by maintaining competitive pricing.
95
List factors affecting contestability.
* Technology * Deregulation * Legal and institutional barriers * Economies of scale ## Footnote Each of these factors can either facilitate or hinder market entry.
96
What are the advantages of contestable markets?
* Improved efficiency and consumer outcomes * Explains competitive outcomes in concentrated markets ## Footnote These advantages highlight the benefits of potential competition.
97
What are the disadvantages of contestable markets?
* Presence of some barriers and non-recoverable costs * Strategic behavior by incumbents may deter entry * Limited innovation if profits are low ## Footnote These disadvantages indicate the complexities of real-world markets compared to theoretical models.

Economics 2.0 (11 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions