Micro- Market Structures Flashcards
(45 cards)
1
Q
what is dynamic efficiency?
A
- refers to how efficient a system is over time
- for it to be achieved, abnormal profits must be made in the long run as firms need to reinvest profits
2
Q
what is static efficiency?
A
- refers to an efficiency at a point in time
- made up of allocative and productive efficiency
3
Q
what is X-inefficiency?
A
- occurs when monopolies do not feel the need to reinvest their profits to improve efficiency
- so they do not produce at their lowest possible cost
- causes: inefficient use of FOP/ Overpaying for FOP
4
Q
what are the conditions for dynamic efficiency?
A
- changed by factors that affect productivity and improve FOP
- technological change can lead to new processes that are more efficient
5
Q
what is productive efficiency?
A
- means firms are operating at the minimum possible cost (lowest point on the AC curve)
- MC=AC
6
Q
what is allocative efficiency?
A
- occurs when the marginal utility the customer gains is equal to the price
- operating on a point on the PPF
7
Q
what are the characteristics of perfect competition?
A
- lots of firm producing homogenous products
- many buyers and sellers
- perfect info
- no/low barriers to entry/exit
- profit maximise
8
Q
what do abnormal profits do to the market?
A
- new firms are encouraged to enter the market
- but this shifts supply to the right, lowering price and only making normal profits
9
Q
what is monopolistic competition?
A
- some product differentiation
- can compete on other things other than price (price and non-price competition)
- barriers to entry are low to medium
- firms have some price setting power and there is brand loyalty
- small to medium sized firms
10
Q
what are examples of non-price competition?
A
- quality of good/service
- special offers
- advertising
- marketing
11
Q
examples of monopolistic competition?
A
- pubs
- hairdressers
- airlines
12
Q
what is an oligopoly?
A
an industry which is dominated by a few firms
13
Q
what are the characteristics of an oligopoly?
A
- a few firms with a high concentration ratio
- abnormal profits in short and long run
- relatively high barriers to entry
- product differentiation
14
Q
what are concentration ratios?
A
they measure the power of firms in an oligopoly
15
Q
what is a collusive oligopoly?
A
- firms in an oligopoly are interdependent- strategies depend on behaviour of other firms
- firms can agree to set prices
16
Q
what are the advantages of oligopoly?
A
- there is often price wars which is good for consumers due to lower prices
- competitive oligopolies are often very efficient
- collusive oligopolies can achieve dynamic efficiency through non-price competition and product development
17
Q
examples of oligopolies?
A
- big 6 energy companies
- mobile phone networks
- coke and pepsi
18
Q
how can governments reduce collusion?
A
- increasing punishments
- whistleblowing
- keeping markets competitive
19
Q
what is the impact on consumers of collusion?
A
- lower consumer surplus and higher producer surplus
- firms will limit output but increase price to profit maximise
- creates a deadweight welfare loss
- still compete in non-price competition
20
Q
what is the kinked demand curve?
A
- assumes that if one firm raises price in an oligopoly, no-one will follow, and if a firm lowers price, everyone will follow
- demand below the kink is inelastic
- demand above the kink is elastic
21
Q
why do prices remain stable in an oligopoly
A
Because of the kinked demand curve. Each firm knows if they increase or decrease price they’ll lose profits
22
Q
what is a monopoly?
A
when one firm dominates a market for a good or service
23
Q
how does monopoly power from?
A
- limited competition in the market
- differences in products and advertising
- barriers to entry stopping new competitors from entering the market
24
Q
what are the advantages of monopolies?
A
- can benefit from economies of scale
- dynamic efficiency can be achieved if a firm wants to reinvest profits
- monopolies can create employment and jobs
- ability to invest in R+D can benefit the firm and society with new advances
25
what are the disadvantages of monopolies?
- consumers have fewer products to choose from
- no guarantee a monopoly will reinvest products
- firms may not improve efficiency even if they can
26
what are natural monopolies?
- industries with very high fixed costs
- characterised by endless economies of scale so long run average costs continues to fall as output increases
- having one firm makes more sense than having two firms eg. railway
27
what conditions are needed for price discrimination?
- the groups being discriminated between must have a different PED
- the firm discriminating must be a price-setter
28
what is first degree price discrimination?
- involves a transfer of consumer surplus to the producer
- each customer is charged the very maximum they are willing and able to pay
- rarely used due to asymmetric information
29
what is second degree price discrimination?
- involves charging different prices based on the quantity purchased
- the more you purchase, the cheaper the product
- this generates revenue from part of the consumer surplus that has been transferred
- it also rewards customers for making larger orders
30
what is third degree price discrimination?
- this charges different prices to customers based on which segment they are in- different age groups/ geographies/ industries
- this is based on the idea that different segments of a market will have different PEDs. Profit is maximised when the price is set where marginal cost= marginal revenue for each particular segment
31
what are the disadvantages of price discrimination?
- it isn't allocatively efficient as the price is greater than the marginal cost
- consumers paying a different price for the same good or service is unfair (moral argument)
32
what are the advantages of price discrimination?
- increased revenue for the firm. Higher profits could be reinvested and improve dynamic efficiency
- those with higher incomes pay more for a good or service than those with lower incomes. Helps to cross-subsidise products so poorer people can afford them
33
what is a monopsony?
A market where one firm purchases all the supply in the market
34
what are the conditions needed for monopsony?
- one buyer and many sellers
| - buyer will be a price setter of wage setter
35
what happens in a monopsony labour market?
- in a perfectly competitive labour market, a firm will hire where the supply is equal to the marginal revenue product (MRP)
- a monopsony employer looking to maximise profits will hire labour at the point where the MRP is equal to the marginal cost
- at this point, the wage is lower than under a perfectly competitive labour market
36
monopsony labour market diagram?
https://www.economicshelp.org/wp-content/uploads/2012/11/monopsony-mw1.jpg
37
what are barriers to entry?
- if there are low barriers to entry it is more contestable and easier to enter that market
- anything that prevents or deters a firm from competing in an industry
38
what are sunk costs?
the costs of leaving an industry. Sunk costs cannot be recovered. If sunk costs are high, markets are not very contestable
39
examples of barriers to entry?
- capital costs
- brand loyalty
- patents
- taxes
- marketing costs
40
how is vertical integration used as a barrier to entry?
- when a firm acquires a large portion of suppliers in the market they can make it difficult for new entrants to find suppliers themselves
41
how is limit pricing used as a barrier to entry?
- established firms set their prices low enough to deter firms from entering
- if the market price is too low then the new firm can't make normal profit and will not enter
42
how are patents a barrier to entry?
- prevent firms from copying protected technology and products
- can lead to monopolies while they are in force
43
what are the benefits of contestability?
- hit and run entry
- competing on quality
- higher investment in R+D
- development of new technology
44
why are firms more allocatively efficient in competitive markets?
- firms choose what to produce based on what ca generate the most profit from the resources they have
- each firm looks at the market prices of goods and services and compares them to the costs of production. Then they produce the most profitable goods
- firms therefore produce the most valuable goods and services to a market
45
how does competition make a firm more productively efficient?
- firms who can produce goods and services using the fewest or cheapest resources can set the lowest price
