3.4 Market structures (+3.2 Business Objectives) Flashcards
(38 cards)
What are efficiencies?
Concerned with how well resources, like time, materials or talents are used
What is static efficiency?
When resources are allocated efficiently at a point of time (short run efficiency)
Different types:
- Productive
- Allocative
What is dynamic efficiency?
When resources are allocated efficiently overtime
Via innovation
The more innovation, the more dynamically efficient a firm is
What is productive efficiency?
When production is achieved at it’s lowest cost
So produces at bottom of AC curve
MC=AR
Only exists where there is technical efficiency
Maximised Economies of Scale
Occurs when firm operates on PPF curve
What is technical efficiency?
When a given level of output is produced with the min number of inputs
Or max output is produced with a given quantity of input
Has to be technical efficiency when productive efficiency is present
- as its the cheapest way to produce
However, not all technically efficient outputs are productively efficient
E.g may be cheaper to produce output with a machines with 2 workers instead of 9 workers
What’s allocative efficiency?
(economic efficiency)
Measures whether resources are allocated to those who demand them
When the scarce resources are used t produce a bundle of goods that satisfies the consumer and maximises welfare
Where supply = demand
MC (supply) = AR / P (demand)
P = MC
What’s X-inefficiency?
(organisable slack)
Specific type of productive inefficiency
Where a firm fails to minimise it’s avg costs at a given level of output
So they don’t work on the curve AC
They work above it
What’s perfect competition?
- Buyers and sellers must be small enough to not influence the price
- Freedom to entry / exit
- Buyers and sellers have perfect knowledge of prices
- All firms produce homogeneous products
AR curve is perfectly elastic
- as a price increase will loose all sellers
so D = AR = MR as a straight horizontal line
Their MC curve is their supply curve
- as they are price takers
In the long run, firms all join as no barriers and removes profits
So theres no profit in long run
Productively efficient
Allocatively efficient
Dynamically inefficient
What’s monopolistic competition?
The same as perfect competition, but sells non-homogeneous products instead
Can increase prices without loosing all customers
- so have downwards sloping AR and MR, but demand is elastic
- not a price taker, but have weak market power
Can make abnormal profits in short run
Can’t in long run, as competition makes AC=AR
Allocatively inefficient
Productively inefficicnet
Dynamically inefficient
What’s an oligopoly?
- Few large sellers dominate the market
- Barriers to entry/exit are high
- Buyers and sellers have imperfect knowledge of prices and competitors’ actions
- Firms produce non-homogeneous products
Firms are interdependent
- an action from a firm affects others
Firms are price makers and adjust quantity based on strategic interaction with competitors
In the long run, firms can earn abnormal profits due to barriers to entry preventing new competitors from joining
Productively inefficient
Allocatively inefficient
Dynamically efficient
What’s collusion?
There’s a very strong incentive for oligopolistic firms to collude
Meaning they make agreements among themselves to restrict competition and maximise benefits
There’s different types of collusion?
- Formal collusion
- Tacit / informal collusion
What’s formal collusion?
Where firms make agreements to limit competition
Typically changing prices and output
Different types:
Price agreements
- where they fix prices, maybe low, to ensure other firms can’t compete
Cartel
- more ‘formal’ than formal
- regular meetings, agreements must be met, no cheating
What’s overt vs covert collusion?
Overt = formal collusion that’s open for everyone to see
Covert = hidden away from legal authorities
Most collusion today is covert
What’s Tacit / informal collusion?
Collusion but no formal agreements about co-operating together
Just monitor each other closely
Could do through price leadership
- where one firm sets a price (often big firm) then smaller firms follow
Game theory
Analysis of situations of groups being made interdependent
may not trust each other, but will be benefits if both of them work together.
- but a bigger reward if they betray, but if both betray, they both get bad
What’s a playoff matrix?
A table showing the possible ways a matrix will play off
How do you draw a playoff matrix?
Have 2 people/ firms etc
Have so they can either accept or deny something and their outcome relies on the other person/firm
Draw vertical lines in all 4 boxes
Have the top left one where they collude, e.g both co operate and both deny they did a crime
Have the bottom right where they both don’t work together and end up getting a longer sentence each
Have the other 2 where the one who try to co-operate looses out massively and the other one is best off
What’s a monopoly?
Only one firm in the market
Barriers to entry are too high to enter
Firm is a price maker
Productively inefficient
Allocatively inefficient
Dynamically efficient
Pure monopoly (100% share)
Working monopoly (firm with monopoly powers, >25%)
Pure monopolies are when it just works out more efficient for only one firm to run the market
E.g tap water
What’s a natural monopoly?
where one firm can supply the entire market demand at a lower cost than if there were multiple competing firms. This happens due to huge economies of scale — so the firm’s average cost (AC) keeps falling as output increases
So LRAC only continues to fall
Where does a natural monopoly produce?
They want to produce at PM: LRMC=MR
But as everyone needs gas, electricity, water etc to solve market failure, regulators make them produce at allocative efficiency, P=MC (AR=LRMC)
However, theres a large subnormal profit here as LRAC is above LRMC here
Therefore, regulators subsidise them the amount of loss per unit (AB per unit)
Leads to natural monopoly being allocative efficient, but only making normal profit
What’s price discrimination?
Done by monopolists to maximise profits
Charging different prices for the same good for different categories of people
Monopolists only do this when:
- face different demand curves
- able to distinct different groups of people
- must be able to keep markets separate for a low cost
What’s the 3 degrees of price discrimination?
First degree
- occurs when firm can charge each customer a different price
- the max price that they will pay
- turns consumer surplus into monopoly profit (can be drawn diagrammatically)
Second degree
- When a firm charges different prices based on the quantity purchased or version of the product, not based on who the buyer is
- When theres a fixed n of products to be sold for no extra costs as its off fixed costs
- Make MC horizontal then shoot up drastically at Q(full)
- have 2 prices - one at MC=MR then one at P=MC
Third degree (important one)
- splits consumers into different groups, based on characteristics
- e.g times for the train, elderly people get cheap etc
- drawing the diagram:
- make 2 diagrams: one inelastic one elastic market
- make MC=AC horizontal
- Create 2 prices based of MC=MR and done
What’s a monopsony?
When there’s only one buyer in the market
No competition to buy due to economies of scale etc
Pay lower prices as firms selling have no choice, but supply them less
- not good for consumers
Have higher abnormal profit
Pure monopsony is rare
- but many firms have monopsony powers
What’s a bilateral monopoly?
When a monopsony meets a monopoly in the market
So theres only one buyer and one seller
There is greater allocatively efficiency here
Prices, quantity demanded/ supplied are all higher
