Market Structures

Question 1

What is allocative efficiency?

Answer 1

Resources used to produce goods with the highest value of consumer wants where P = MC

Question 2

What is productive efficiency?

Answer 2

Where a firms produces at lowest average cost (MC = AC), minimum point in LRAC

Question 3

What includes static efficiency and what is it

Answer 3

Productive and allocative efficiency, efficiency at the present

Question 4

What is dynamic efficiency

Answer 4

Efficiency/time (future efficiency) - encourages innovation

Question 5

What is X inefficiency

Answer 5

Above the LRAC curve where a firm is not productively efficiency due to lack of incentive to cut cost like no competition

Question 6

What is perfect competition

Answer 6

A market structure where there is:
High competition
Firms are price takers
Many buyers and sellers
Low/no barriers of entry and exit
Perfect knowledge
Goods are homogenous

Question 7

What examples are there of barriers to entry and exit

Answer 7

This includes regulation and sunk cost

Sunk cost examples: Diminishing value of capital and mainly marketing

Question 8

In the long term what can a firm in perfect competition do?

Answer 8

Normal profit maximise

Question 9

Describe the efficiency of perfect competition

Answer 9

It is static efficient
They’re are not dynamically efficient
Unable to benefit for EOS

Question 10

What is monopolistic competition and its characteristics?

Answer 10

Form of imperfect completion, characteristics include:
many buyers and seller
No to low barriers of entry and exit (as firms are attracted to SNP)
Goods are differentiated

Question 11

Why is in monopolistic competition firms can only SNP, NP, and SP in short run but only NP in long run

Answer 11

As due to low barriers to entry firms may enter the market attracted to SNP and firms may leave the market due to high costs.

Question 12

Efficiency in the Monopolistic competition

Answer 12

Not static efficient
Is dynamically efficient
May enjoy some EOS

Question 13

Characteristics of an oligopoly

Answer 13

A few firms dominate the majority of the market.
Differentiated goods
High concentration ratio
Interdependent
High barriers to entry

Question 14

What diagram shows the behaviour of oligopolies (interdependence or collusion)

Answer 14

Kinked diagram

Pay off matrix

Question 15

Define collusion

Answer 15

Firms make a collective agreement that reduces competition

Question 16

Reason to collude

Answer 16

Increased joint profit

Reduce uncertainty

Question 17

What are the two types of collusion

Answer 17

Overt (formal agreement) called a cartel for oligopolies w/ formal document
Tacit (illegal)

Question 18

When does collusion work best?

Answer 18

When goods are homogenous and firms have dominant market share

Question 19

What can oligopolies compete on if they’re colluding

Answer 19

Non-price competition to maximise market share

Question 20

Why may collusive agreements break down

Answer 20

There is incentive to cheat the quote (pay off matrix)

Question 21

What is price leadership

Answer 21

When a firm has dominant advantages such as size so other firms would follow their price (price makers)

Question 22

Types of price competition

Answer 22

Price wars (when its difficult to collude)
Limit pricing
Predatory pricing

Question 23

Other pricing strategies:

Answer 23

Psychological pricing
Price skimming (set high then cut over time)
Penetration pricing (set low)
Cost plus pricing
Market led pricing

Question 24

Types of non-pricing competition

Answer 24

Branding
Loyalty card schemes
Advertisement
Quality
Customer service

Question 25

What is a monopoly?

Answer 25

One firm is the sole seller, legal monopoly owns more than 25% of the market, they have high barriers to entry

Question 26

What is price discrimination?

Answer 26

When monopolies charge different prices to different people for the same good or services

Question 27

What criteria is needed for price discrimination to occur?

Answer 27

Must be able to separate the market
Different elasticities of demand
Control of supplies

Question 28

3 types of price discrimination markets

Answer 28

Inelastic markets (most profit)
Elastic markets (least revenues)
Combined markets (shares both elasticities halfway)

Question 29

Benefits of price discrimination?

Answer 29

Increase in profits for dynamic efficiency
Lower prices may increase equality

Question 30

What are natural monopolies?

Answer 30

EOS is larger as a single producer can’t exploit them all.
Costs are too high for new firms to enter the market
Industries with very high fixed costs
These firms are neither allocatively or productively efficient

Question 31

What is a monopsony?

Answer 31

There is only one buyer in the market. Same characteristics as monopolies.
They will pay their suppliers with the lowest price possible to minimise cost

Question 32

What is a contestable market:

Answer 32

High threat of new firms entering the market or leaving the market.
Perfect knowledge
No to low barriers of entry and exit
Absence of sunk cost
Low product loyalty

Question 33

What are the types of barriers to entry?

Answer 33

Legal barriers - including patents, limit pricing
Natural barriers - natural resources, EOS

Question 34

What is a sunk cost

Answer 34

It is a cost that cannot be recovered after leaving the industry