Imperfect Markets + Market Power Flashcards
(12 cards)
When does market failure occur
when resources are not allocated efficiently
total economic surplus is not being maximised and therefore requires gov intervention
what are the 4 main types of market failure
market power, externalities, public goods, common property resources
What are the 4 characteristics of an imperfect or non competitive market
- small number of firms
- market power
- product differentiation (products are made to look different
- barriers to entry
CHARACTERISTIC 1: Small Number of FIrms
describe the 2 types of markets that are imperfect
Monopoly - market with 1 firm only (aus post = gov regulation)
Oligopoly - market with few firms (coles and woolworths)
CHARACTERISTIC 3: Product Differentiation
what is product differentiation
products are made to look different because businesses with market power can afford to do so
CHARACTERISTIC 4: Barriers to Entry
what does this mean? AND what are 5 examples of barriers
anything that restricts entry of new firms into the market gov regulation (aus post), control of scarce resource (only 1 diamond mine in Aus - Rio Tinto), high start up cost)
CHARACTERISTIC 2: Market Power
when do businesses have market power
a firm has market power if it can affect the market by varying output and setting high prices therefore - exploiting the market
Why do firms want market power
so that they can profit maximise = higher prices, reduced output (decreases economic welfare for society)
On a graph where do perfect/competitive markets produce
at equilibrium
what does consumer and producer surplus do on the graph
consumer surplus - decrease
producer surplus - increase
Is there a deadweight loss? and why
yes - total surplus decreases due to market restriction
draw a competitive market graph vs a non competitive market graph
qunatity decreases and price increases on non
