Market Structures Flashcards
(21 cards)
Pure monopoly
is single seller of a product,25% of market share, profit max at mr=mc and level of production ar >Ac
Negatives of Monopolies
Productively Inefficient-Becomes too large —suffer from diseconomies of scale(increase in output— increase in costs—Less communication)
Allocatively inefficient-Monopolies exploit consumers charging prices greater than MC(P> MC)—resources are not allocated according to consumer demand-less consumer surplus—OR less quality due to lack of comp
Positives of Monopolies
Dynamically efficient-SNP made in the long run-Increase investment in tech— increase in quality—-Fall in costs— fall in prices— Consumer Surplus
Large- Increase in EOS — fall in AC — Fall in prices
evaluation of monopolies
Monopolies heavily regulated may not produce inefficent outcomes-effective regulations using price controls,quality measured of forced re investment will ensure the public interest is made— federal energy regulatory commision (pacific gas company)-eval for allocatively inefficient
Monopolies making snp in lr no guarentee this profit will be used for re investment and this dynamic efficiency will occur— may be given to share holders(94% of profits to dividends thames water)
-Monopolies are productively inefficient-dont produce at minimum point on AC curve-forego eos
Natural Monopoly Characteristics
Occurs when there are huge fixed costs in production-significant costs of infrastructure-electricity ,gas ,water supply
competition result in productive inefficiency-growth potential of business is smaller preventing full exploitation of huge E)S
competition results in allocative inefficiency
regulators force them to produce at ar=mc p1 falls to p2 increase in quantity increase eos fall in prices
how monopolies develop
Horizontal integration , where two firms join at same stage of production
Characteristics of Perfect Competition
many infinite buyers and sellers
homogenous goods and services
no barriers to entry( normal profit in LR)
-perfect information for consumers and producers
Benefits of Perfect Competition
Productively efficient achieved in LR-Perfect competitve firms produce at lowest point of AC curve where MC=AC all possible eos exploited as the cant increase output and lower ac further )
Allocatively efficiency-produce where p=mc=where demand equals supply maximising consumer surplus-resources allocated according to consumer demand with consumers getting what they want an increase in choice and quality
examples of diseconomies of scale
British Petroleum (BP) experienced such diseconomies leading up to the 2010 Deepwater Horizon oil spill, where management inefficiencies and communication breakdowns in its vast operations contributed to the disaster
perfect competition example
The agricultural market serves as a real-world approximation; numerous farmers produce standardized crops like wheat, with no single farmer able to influence market prices. This structure ensures resources are allocated efficiently, and goods are produced at minimal costs
costs of perfect competitionr
not dynamically efficient—restricting firms ability to reinvest— fall in innovation—fall in choice—preventing price falls
Lack of Economies of Scale-despite achieving productive efficiency and fully exploting eos is limited c compared to huge firms
Eval: firms may be forced to reinvest whatever profits they are making in order to stay ahead in such competitive markets
characteristics of oligopolies
Few large firms dominating the market.Hig concentratio ratio with a few firms taking approximately 70% of the market. Lvel of comp is therefore not naturally strong.
Goods and services are differentiated-firms are price makers able to set prices given unique nature
High barriers to entry-Snp can be sustained in the long run—
High barries may be due to high start up costs,brand loyalty or economies of scale
Interdependence in oligopoly where firms make decisions based on actions and or expected reactions of rivals.
oligopoly firm behaviour(kinked demand curve)
Raising prices form p1 to p2 will take them onto price elastic part of demand curve where the proportionate decrease in quantity demanded from q1 to q2 is l greater than the increase in price causing total revenue to fall as rival firms will react by keeping prices fixed.
oligopoly performance outcomes
Firms may break interdepence be engagiging in tacit collusion this is where an informal agrreemnt is made between firms to not engage in price war
will break interdepence by colluding-acts as a monoppolist
Cons of Oligipolies
Collusive oligipolies (Cartels) produce outcomes that are allocatively inefficient—-Exploit consumers chargin prices greater than margical cost at profit maximising level. At this point resources are not allocated according ton consumer demand with consumers getting a lower quality than what theu desire. Thereby consumer choice is restricted and prices are high reducing consumer surplus..
Cartels are productively inefficient—this is because they do not produce at minimum point on AC curve voluntarily forgo some economies of scale. Consumer suffer higher prices and lower consumer surplus.
Cartels can be x inefficnet this is because they become complacemnt a lazy and process alowing waste to creep in.
if they become too large they may suffer diseconomies of scale.
Oligopoly Performance Proszxc
-Dynamically efficient — for the cartel new product development an maintain monopoly power especially if products are patentable which allows a reduction in cop increasing profit
Cartels are productively inefficient they may be still exploitng greater economies of scale than smaller cometitive firm. therebby cop comparted to competive fiirms are lower resulitning in lower prices charged and higher quantities produced.
if oligopolists behave competitively outcomes could be like those attained in competitive market structures. Allocative efficency can be achieved as resources allocated according ton consumer demand getting the quantity they desire given they competite signifcantly on both price non price factors consumer choice is high and prices are low increasing consumer surplus
behaving competiively can lead to productive efficiency.
evaluation for firms becoming cartels(means ae and pe inefficient may not occur)
Markets that are saturared and unstable with lots of price movements and fierce competition is unlikely to lead to cartel agreements being made or lasting over time
Markets like Bitcoin, Ethereum, and altcoins are highly saturated with many competing projects and often see extreme price swings driven by speculation BCH and BSV communities tried to cooperate to gain market share over Bitcoin, aggressive community competition (especially between Roger Ver and Craig Wright) led to fragmentation. Both coins were also hit hard by crypto-wide volatility, mining profitability swings, and loss of market confidence.
allocative efficiency
occurs when mc=ar
where demand == supply maximing sum of both consumer and producer surplus
at this point of production resources llocated according to consumer demand with consumers getting what they demand at exact quantity they desire
productive efficiency
where m=act this means all possible economies of scale are exploited as firms cannot increase output and lower average cost
these lower ac may translate to lwoer prices for consuemrs increasing consumer surplus
dynamic efficiency
occurs when snp is made in lr such profit can be reinvested back intoc ompany in form of technology advances innovative new products and r and D this is hugely beneficial for consumers who will receive brand ew better quality products over time
