Market structures 3.4

Question 1

Allocative efficiency

Answer 1

Where all resources within an economy are allocated efficiently
P=MC (AR=MC)

Question 2

Productive efficiency

Answer 2

When products are produced at the lowest average cost (AC)
MC=AC in the short run

Question 3

Dynamic efficiency

Answer 3

All resources allocated efficiently over time as a result of investment and innovation.
Made more likely with copyright and patent laws

Question 4

X-Inefficiency

Answer 4

If a firm fails to minimise its average costs at a given level of output.
Most likely to happen when there is little competition

Question 5

Perfect Competition characteristics

Answer 5

• Homogenous goods
• Perfect information
• Low barriers to entry
• Many firms
• Normal profit in the long-run

Question 6

Perfect Competition efficiencies

Answer 6

Allocative- Yes
Productive- Yes
Dynamic- No
X-efficient- Yes

Question 7

Monopolistic Competition characteristics

Answer 7

• Differentiated goods
• Imperfect information
• Many buyers and sellers
• Low barriers to entry
• Normal profit in the long-run

Question 8

Monopolistic Competition efficiencies

Answer 8

Allocative- No
Productive- No
Dynamic- Likely in short-run
X-efficient- No

Question 9

Oligopoly Characteristics

Answer 9

• Differentiated goods
• Imperfect information
• Few dominant firms
• High barriers to entry
• Supernormal profits in the long-run

Question 10

Concentration ratio

Answer 10

Percentage of the total market that a particular number of firms have

Question 11

Collusion

Answer 11

when firms make collective agreements that reduce competition
- Illegal

Question 12

Reasons for Collusion

Answer 12

• Maximise industry profits
• Reduces uncertainty

Question 13

Overt Collusion

Answer 13

When firms come to a formal agreement
Cartel = A group of firms who enter into agreement to mutually set prices
May be in a formal document

Question 14

Tacit Collusion

Answer 14

No formal agreement such as price leadership and barometric firm

Question 15

Price Leadership

Answer 15

Where one firm has advantages due to its size or costs and becomes the dominant firm. Other firms tend to follow this firm because they are fearful of taking on the firm. The dominant firm will then decide the price.

Question 16

Barometric Firm

Answer 16

Where a firm develops a reputation for being good at predicting the next move in the industry and other firms decide to follow suit.

Question 17

Non-Collusive = Game Theory

Answer 17

The reactions of one player to changes in strategy by another player.

Question 18

Maximin Policy

Answer 18

Firms working out the strategy where the worst possible outcome is the least bad

Question 19

Price wars

Answer 19

Occur in markets where non-price competition is weak or when it is difficult to collude.
Will drive prices down to levels where firms are frequently making losses. Long run, other firms will leave the market and prices will have to rise as a result of supply falling.
Eg. Supermarkets

Question 20

Predatory pricing

Answer 20

Occurs when an established firm is threatened by a new firm.
Established firm will set a low price where other firms are unable to make profit and so will leave the market.
This is illegal and only works where a firm is large enough to sustain losses.

Question 21

Limit pricing

Answer 21

Firms will set prices low (to the limit price) in order to deter new firms from entering the market.
The low price needs to be high enough that they make at least normal profit.
Mainly used in contestable markets (barriers to entry)

Question 22

Other pricing strategies

Answer 22

Psychological- use non-rounded numbers to seem cheaper eg. 99p, £1.49
Cost Plus- Where firms work out their AC and add a percentage increase

Question 23

Non-price competition

Answer 23

-Advertising
-Loyalty cards
-Branding
-Quality
-Customer Service
-Product Development

Question 24

Oligopoly Efficiencies

Answer 24

Allocative- No
Productive- No
Dynamic- Yes
X-efficient- Yes

Question 25

Monopoly Characteristics (>25% of market)

Answer 25

- Differentiated goods - Imperfect information - High barriers to entry - One dominant firm

Question 26

Price discrimination

Answer 26

Where monopolists charge different prices to different people for the same good or service. Must be able to clearly separate the market eg. different elasticities of demand

Question 27

Natural Monopoly

Answer 27

include; National Grid, Royal mail, and National Rail

Question 28

Monopoly efficiency

Answer 28

Allocative- No Productive- No Dynamic- Yes X-efficiency- Depends

Question 29

Monopsony Power

Answer 29

Only one buyer in the market eg. NHS, Amazon They will pay their suppliers the lowest price possible to minimise their costs. Allows them to maximise profit

Question 30

Monopsony power on firms

Answer 30

Monopsony gains higher profits. They achieve purchasing economies of scale

Question 31

Monopsony power on consumers

Answer 31

May gain lower prices as reduced prices are passed on May lead to a fall in supply, since the business buys fewer inputs. May be a fall in quality as prices are driven down May act as a counter-weight to monopolists (don't agree)

Question 32

Monopsony power on employees

Answer 32

The supplier will sell less goods and so employ less people. Monopsonists may pay higher wages as they are making higher profits

Question 33

Contestability

Answer 33

Firms entering the market if they think they will make money, rather than the number of firms in the market.

Question 34

Contestable Market characteristics

Answer 34

- Perfect information - Low/ No barriers to entry - Absence of sunk costs - Best available technology - Low product loyalty