Market Structures

Question 1

What do economists use when analysing different markets?

Answer 1

N-Firm concentration ratio

• measures how much market share the N largest firms in a market have

(N represents a number)

• to work out identify the N largest firms, not other

Question 2

Efficiency

Answer 2

• Efficiency is used to judge how well the market allocates resources.
• Different types of efficiency include allocative efficiency, productive efficiency, dynamic efficiency, and X-inefficiency.
• Allocative efficiency occurs when resources are used to produce goods and services that consumers want and value the most.
• Productive efficiency is achieved when the firm produces at the lowest average cost.
• Dynamic efficiency occurs when resources are allocated efficiently over time, while static efficiency exists at a single point in time.
• X-inefficiency occurs when a firm fails to minimize its average costs at a given level of output.

Question 3

Perfect Competition

Answer 3

• Perfect competition is a market structure characterized by a high degree of competition.
• There are four key characteristics of perfect competition: many buyers and sellers, freedom of entry and exit from the industry, perfect knowledge, and homogenous products.
• Firms in perfect competition are price takers.
• Profit maximization in perfect competition occurs where MC=MR.
• Perfect competition in the long run is both allocative and productively efficient, but they are not dynamic efficient.

Question 4

Monopolistic Competition

Answer 4

• Monopolistic competition is a form of imperfect competition with a downward-sloping demand curve.
• Key characteristics of monopolistic competition include many buyers and sellers, ease of entry and exit from the industry, differentiated goods or services, and non-collusive behavior.
• In the short run, a firm in monopolistic competition can make normal profits, supernormal profits, or losses.
• In the long run, firms in monopolistic competition can only make normal profits.
• Monopolistically competitive firms are neither allocative nor productively efficient.

Question 5

Oligopoly

Answer 5

• Oligopoly is a market structure where there is a concentration of supply in the hands of a few dominant firms.
• Key characteristics of oligopoly are interdependence between firms, few firms with high market concentration, barriers to entry, and differentiated or homogenous products.
• Oligopolistic firms can either participate in collusion or non-collusive behavior.
• Strategies for collusion include overt collusion (cartels) and tacit collusion (no formal agreement).
• In oligopoly, firms will short-run profit maximize.
• Game theory provides insight into decision making in oligopoly markets.

Question 6

Monopoly

Answer 6

• Monopoly is a market structure where there is only one seller of a good or service.
• Characteristics of a monopoly include a single seller, no freedom of entry and exit from the industry, a downward-sloping demand curve, and high barriers to entry.
• In a monopoly, the firm will produce where MC=MR.
• Third-degree price discrimination occurs in monopolies.
• Monopolies are generally considered to be productively and allocatively inefficient.
• A natural monopoly is a monopoly that exists because of economies of scale.

Question 7

Monopsony

Answer 7

• Monopsony is a market structure where there is only one buyer of a good or service.
• Characteristics of a monopsony include a single buyer, no freedom of entry and exit from the industry, and the ability to drive down prices due to market power.
• Monopsonists employ purchasing economies of scale, which allow them to lower costs and increase profits.
• In a monopsony, the supplier will sell less goods, leading to some firms leaving the market.
• Consumers may gain from lower prices, but it could lead to a fall in supply.

Question 8

Contestability

Answer 8

• Contestability is the possibility of other firms entering the market if they see the opportunity to make money.
• Characteristics of a contestable market include perfect knowledge, freedom of entry and exit, low product loyalty, and short-run profit maximization.
• Legal and marketing barriers, pricing decisions, and sunk costs can act as barriers to entry and exit.
• A perfectly contestable market has no sunk costs or barriers to entry and exit.
• The degree of contestability measures the extent to which the gains from market entry exceed the costs of entering the market.