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A Level Economics > 6: Market structures > Flashcards

6: Market structures Flashcards

(92 cards)

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1
Q

Productive efficiency

A

Lowest point of the ATC curve

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2
Q

Allocative efficiency

A

When a firm produces at a point where economic welfare is maximised (supply meets demand)

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3
Q

Dynamic efficiency

A

When a firm reinvests their profits to become more efficient

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4
Q

X-inefficient/X-efficent

A

Costs are high/lower than they should be

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5
Q

Productive + allocative =

A

Static efficiency

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6
Q

Characterisitcs of a monoply

A

Firm is the industry - whole output by the firm (single seller good)
Barriers to entry
No substitutes for the good
Profit maximise
Price maker

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7
Q

What is the deadweight loss in a monoply?

A

Consumer surplus lost and producer surplus ganied results in an overall loss of economic welfare

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8
Q

Pros of a monoply

A

Supernormal profits -> reinvest -> dyanmic efficiency -> lower ATC -> could lower prices -> increase consumer surplus
Economies of scale

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9
Q

Cons of a monoply

A

No allocative efficiency
High prices/lack of choice
Not productively efficient
X-inefficiency

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10
Q

Price discrimination (draw diagram)

A

When a firm with market power charges a different price to consumers for an identical product i.e. age, time of day, georgraphy

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11
Q

Conditions to price discriminate

A

Market power
No resale
Segregate the market between consumers with different willingess to pay and different PED

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12
Q

Cross-subsidisation

A

Those who pay a higher price, subsidise those who pay a lower price

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13
Q

Price discrimination pros

A

Profitable -> higher total revenue
Larger output
Cross subsidisation -> allows poorer customers access
Manages demand
Reinvest profits -> long-term benefits of increased dynamic efficiency + lower prices

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14
Q

Price discrimination cons

A

Unfair
Predatory pricng
Decline in consumer surplus

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15
Q

Natural monoplies

A

When competition is inefficient as it would increase costs i.e. railways and water companies

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16
Q

Characterisitics of a natural monoply

A

High capital cost to set up
Duplication is unecessary and wasteful
The MES does not occur until an extremely high level of output as the economies of scale do not diminish in the foreseeable future

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17
Q

Perfectly competitive market characterisitcs

A

Large number of buyers and sellers
Produce homogeneous goods (identical products)
No one firm or individual large enough to affect market price (price takers)
Factors of production are perfectly mobile
Customers and firms have perfect knowledge
No barriers to exit and entry
Have dynamic and allocative efficiency
Examples: Foreign exchange markets, agricultural markets, internet related markets

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18
Q

What is the shut down price in a perfectly competitive market?

A

AR < AVC - firms may make a loss but will remian in a market in case another firm leaves

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19
Q

Monopolistic competition characterisitcs

A

A form of imperfect comeptition
Found in many real world markers i.e. clusters of sandwhich shops, fast food and coffee shops in a town centre to pizza deliveries in a city or local haridressers
More realistic than perfect competition as products are differentiated

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20
Q

Does the demand in monopolistic comeptition represent the firm or the market and why?

A

The firm as other firms within the market produce partial but not perfect substitutes. Demand curve likely to be more elastic

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21
Q

Assumptions regarding monopolistic competition

A

Many consumers and producers
Consumers perceive there is non-price differences between products i.e. product differentiation - plenty of consumer switching
Producers price makers but price elasticity of demand is higher than that of a monoply
Low barriers to exit and entry

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22
Q

Efficiencies in monopolistic competition

A

Dynamic efficiency
X - efficiency

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23
Q

Problems with monopolistic competiton

A

Stable equilibrium is never reached
Inefficient outcome
Not allocatively efficient
Unable to fufill economies of scale
Critics of heavy spending on advertising and marketing argue that much of this spending is wasted and an inefficient use of scarce resources

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24
Q

Characteristics of an oligopoly

A

High concentration ratio (handful of large firms)
Differentiated products
High barriers to exit and entry
Mutual interdependence
Non-price competition

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25
What happens if one firm lowers their price in an oligopoly?
Other firms follow -> price wars in lower and lower prices -> no firm wins
26
Collusive oligopoly
Firms act like a monoply and want to remove uncertainty by agreeing on price and output
27
Non-collusive oligopoly
Firms act independently and do not form agreements with each other
28
Overt collusion
Firms work openly together to agree on prices or market share
29
Tacit collusion
Unspoken actions between oligopolistic firms that are likely to minimise a competitive response
30
Price leadership
A leading firm in a given industry is able to exert its influence in the sector that it is in and can effectively determine the price of goods or services for the entire market -> leaves rivals little choice but to match price in order to keep market share
31
Pros of cartels
Dynamic efficiency Industry supernormal profits Firms + consumers price stability
32
Cons of cartels
Firms may not make supernormal profits -> risk the cartel may break down Consumer pays higher prices
33
What does a cartel depend on?
Lower or increase price Incentive? Could be drive out comeptition
34
Game theory
A method of modelling the strategic interaction between firms in an oligopoly
35
What are the roles when game theory is applied to oligopolies?
Players = firm, game played on the market, strategies = price and output decisions, payoff = profits
36
Dominant strategy
a situation in game theory where a player's best strategy is independent to those chosen by others
37
Nash equilibrium
a situation within a game when each player's chosen strategy maximises pay-offs given in the other player's choice so that no player has an incentive to alter behaviour
38
Imperfectly competitive markets
Firms face real and potential competition, argues that the number of firms is not important, what matters is the absence of barriers to entry and the level of sunk costs
39
Perfectly conestable markets
Free entry to new firms and free exit for incumbent firms
40
Sunk costs
Irrecoverable costs to the owners of the firm should it close down or leave the market. Act as a barrier to entry
41
Low contestability
Difficult to enter
42
High contestability
Easy to enter
43
What is hit and run entry?
Short run entry into a market aiming to take some monoply profits and leave the market. Possible when entry and exit costs are low and when the exisiting firms are charging higher prices compared to costs
44
Where does increasing contestability come from?
De-regulation and new technology
45
Competition policy
A set of measures designed to promote competition in markets and protect consumers in order to enhance the efficiency of markets. Has 4 strands: monoplies, mergers, restrictive trade practices and promotion of new competiton
46
Structure, Conduct, Performance paradigm
Structure: Number of comeptitors, heteroheneity of product, cost of entry and exit Concduct: Price taking, product differentiation, tacit collusion, exploitation of market power Performance: Productive efficieny, allocative efficiency, profitable Argues that market structure determines how firms conduct themselves and that this in turn determines performance of the market
47
Government intervention: Mergers
Comeptition and markets authority (CMA) inevstigate mergers that result in a 25%+ market share to prevent uncompetitive outcomes in the market If merger not in public's interest will be blocked CMA want to prevent firm having large market share which could lead to high price, low quantity and quality which exploit customers
48
Government Intervention: Quality standards
Legislature to ensure firms meet a min quality standard i.e. gas and electric companies can'tçut off gas/electric for pensioners if they haven't paid their bill during winter
49
Government Intervention: Performance targets
Ensure firms are operating in the consumer's interest and that competitive outcomes are achieved i.e. rail companies only allowed a certain amount of delays
50
Government enhancing competition between firms through promotion of small business
Deregulation -> removes govt controls -> removes barriers to entry Improvement in access to finance for small businesses Reduce tax Provide grant/subsidy
51
Government intervention: deregulation
Removal of govt controls i.e. BT's infrastructure given to competitors in telecoms industry -> promotes comeptition and market contestability by removing artificial barriers to entry
52
Deregulation pros
More consumer choice Lower price Contestability More govt revenue through tax
53
Deregulation cons
Negative externalities Less SNP -> less dynamic efficiency Smaller firms would be less efficient -> fail when market conditions change Diseconomies of scale
54
What does deregulation depend on?
The extent to which other barriers to entry and exit remain and the extent to which it results in greater comeptition in a specific area
55
Comeptitive tendering
Governments contract out a provision to a firm offering lowest price and best quality of provision Saves public sector beauracy and inefficiency Private sector has incentivve to reduce costs due to comeptitive nature + frees govt of maintenance as private sector has expertise
56
Pros of comeptitive tendering
Increased comeptition Greater efficiency Transparency Value for money
57
Cons of comeptitive tendering
Limited choice Reduced quality Bureaureacy Privatisation
58
Privatisation
Transfer of assets or organisations from state ownership to private ownership i.e. Britsh Airways, British Gas
59
Pros of privatisation
Revenue from sales (for govts) Increased comeptiton -> fall in costs -> X-efficiency, productive efficiency
60
Cons of privatisation
Negative externalitites Public goods not provided as not profitable Risk of no economies of scale
61
Nationalisation
When private sector assets are to sold to the public sector
62
Nationalisation pros
Protects jobs Protects GDP Systemic risk Positive externalities Social welfare
63
Nationalisation cons
Tax payers pay -> austerity Moral hazard
64
What type of demand is the demand for labour?
It is derived demand meaning it depends on the demand for the product a worker is producing. i.e. increase demand for coffee -> increased demand for baristas
65
Marginal product =
Number of extra units of output a firm gains by employing an extra unit of labour. Change in total product / Change in number of workers
66
Marginal revenue =
Change in total revenue / Change in output
67
Marginal revenue product of labour =
The addition to a firms revenue by employing an additional worker MR x MP
68
Problems with Marginal Revenue Product of Labour (MRPL)
Difficulties measuring Efficiency wage theory -> higher wage increases productivity Non-monetary benefits of jobs Public sector wages
69
What causes a shift out right for MRPL?
Improved training, better capital and/or management Increased demand for final product Increase in productivity Firms profitability Changes in number of firms
70
Elasticity of demand for labour =
Measures the responsiveness of the quantity demanded of labor to changes in wage rate % change in quantity of labour demanded / % change in wage rate
71
Factors determining EDL:
Propotion of labour cost to total cost - Larger the proportion of labour cost to total cost, the higher the elasticity of demand for labour. Demand = more elastic in labour intensive industries Availability of substitutes - more elastic when labour and capital are interchangeable, more inelastic with specialised labour Price elasticity of demand for final product
72
Labour Supply
Number of workers willing and able to work in a given occupation or industry at a given wage
73
Factors affecting supply of labour
Real wage rate on offer in the industry Migration of labour Perks Barriers to entry Bonuses/commission/overtime Mobility of labour Substitute occupation
74
Elasticity of supply of labour =
Measures the responsiveness of the quantity of labour supplied to change in the real wage rate % change in quantity of labour supplied / % change in wage rate
75
Factors affecting elasticity of labour supply
Skills + qualifiations required for the job Length of training Sense of vocation (enjoyability of a job) Time period
76
Geographical immobility
Occurs when workers find it difficult or impossible to move to jobs in other parts of the country or other countries for resosn such as higher housing costs in where jobs exist and family problems
77
Occupational immobility of labour, capital and land
Occurs when workers find it difficult or impossible to move between jobs because they lack or cannot develop the skills required for new jobs
78
Government policies to combat geographical immobility
Improve supply of housing, reducing rent Offer subsidies Harmonisation of welfare and tax systems that encourage inward migration of labour within the European economy
79
Firms policies to combat georgraphical immobility
Relocation packages -> reduce costs of paying form schools
80
How to combat occupational immobility of labour
Training schemes Increased investment in vocational education and life-time learning opportunities Flexible working
81
Why does national min wage go up?
In line with inflation More workers -> reduce unemployment Wage efficiency theory Prevent exploitation
82
Trade unions
An organisation of workers who joing together to further their own interests through process of collective bargaining i.e. Transport and general workers union
83
Monopsony
Another influence on wages
84
Monopsanist
Single dominant buyer of a good/service or factor of production i.e. government is main employer of soldiers
85
Conditions for a monopsony
Price makers -> dictate wages To employ more workers, wage rate has to increase Marginal cost of labour will exceed the average cost of labour If you pay the next worker a higher wage, all other workers need to be on the same wage
86
Reasons why min wage results in unemployment
If set too high If MRPL cannot shift right
87
Reasons why min wage doesn't result in unemployment
Wage efficiency theory (shift in demand for labour) Imperfect labour market -> inc wages = inc no. employment -> depends on level of min wage Public vs Private
88
Monopsony pros
Job stability Low cost Low price Profit driven -> dynamic efficiency Guranteed supply
89
Monopsony cons
Decline in industry -> structural unemployment Exploit workers -> drive down wages but depends on perks Exploitation of suppliers
90
Current labour market issues
Public sector workers undervalued and underpayed -> strikes Gender pay gap Rise in the economically inacitve Inflation -> fall in real wages Hard to fill vacancies i.e. hospitality, public sector
91
National min wage pros
Reduce poverty Reduce inequality Prevent unemployment trap Fair wag
92
National min wage cons
Job losses Higher costs = higher prices Doesn't take into account regional differences

A Level Economics (15 decks)

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