Mkt Structures Flashcards
(117 cards)
1
Q
What characterizes a competitive market structure?
A
A large number of small firms and buyers
Examples include perfect competition
2
Q
What characterizes an uncompetitive market structure?
A
A small number of large firms; high concentration ratio
Examples include oligopoly or monopoly
3
Q
What are barriers to entry?
A
Factors that make it difficult or impossible for firms to enter an industry and compete
Can lead to less competition and more market concentration
4
Q
What are natural barriers to entry?
A
Barriers due to the nature of the industry that make it efficient for one or a small number of large firms to operate
Examples include high economies of scale
5
Q
What are legal barriers to entry?
A
Laws and regulations that make it difficult for firms to join the industry
Examples include patents, copyrights, and trademarks
6
Q
What are strategic/artificial barriers to entry?
A
Barriers put in place by existing firms to prevent competition
Can be anti-competitive and may be illegal
7
Q
What are examples of natural barriers to entry?
A
- High capital start-up costs
- High sunk costs
- High economies of scale
- Geographical barriers
8
Q
What are examples of legal barriers to entry?
A
- Patents
- Copyrights
- Trademarks
- Licensing
- Public franchises
- Import controls
9
Q
What are examples of strategic barriers to entry?
A
- Ownership of production factors
- Control of necessary technology
- Limit pricing
- Predatory pricing
- Marketing barriers
- Other anti-competitive practices
10
Q
What are barriers to exit?
A
Factors that make it difficult or impossible for firms to cease production and leave an industry
High barriers to exit can deter entry into an industry
11
Q
What are some examples of barriers to exit?
A
- Asset write-offs
- Closure costs
- Lost reputation
12
Q
What type of product do firms in a competitive market structure typically sell?
A
Homogeneous (identical) or very similar products
Examples include foreign exchange markets and fishing
13
Q
What type of product do firms in an uncompetitive market structure typically sell?
A
Differentiated products
Example: A BMW car is not the same as a standard car
14
Q
What is product proliferation?
A
Large firms producing several versions of the same good
Example: L’Oreal owning many beauty brands
15
Q
What is limit pricing?
A
A pricing strategy where a monopolist cuts its price to deter new competition, making only normal profit
AC = AR = P
16
Q
What is predatory pricing?
A
A pricing strategy where a monopolist cuts its price to a loss-making level to eliminate competition
Prices are raised again once competition is eliminated
17
Q
What is a monopsony?
A
A market structure with a single buyer
It gives the buyer significant market power
18
Q
What is buying power in the context of monopsony?
A
The ability of a firm or group of firms to negotiate better prices from suppliers
Can lead to lower wages in labor markets
19
Q
What is economic efficiency?
A
Economic efficiency is about a society making optimal (best) use of our scarce resources to help satisfy changing wants and needs.
20
Q
Define allocative efficiency.
A
Allocative efficiency occurs when the value that consumers place on a product equals the marginal cost of factor resources used up in production.
21
Q
What is the condition for allocative efficiency in a market?
A
Price = marginal cost of supply (P = MC).
22
Q
What happens in a competitive market up to output Q?
A
The price consumers are willing to pay is higher than the cost of the scarce resources used to produce the good.
23
Q
When is social welfare maximized in a competitive market?
A
Social welfare is maximized when the equilibrium quantity is produced.
24
Q
Define productive efficiency.
A
Productive efficiency occurs when a firm is producing goods or services at the lowest possible average cost, using the fewest possible resources.
25
What is the output condition for achieving productive efficiency?
Productive efficiency is achieved at an output that minimises the unit cost (AC) of production.
26
What is X-inefficiency?
X-inefficiency occurs when a firm is not operating at its optimal level of efficiency due to internal factors such as poor management, lack of motivation, and bureaucratic inefficiencies.
27
What does dynamic efficiency refer to?
Dynamic efficiency refers to ongoing innovation of products and production techniques and is all about long-term growth and development.
28
What is product innovation?
Product innovation is when companies invest in R&D and introduce new products or services to increase their competitive advantage, reduce costs, and improve quality.
29
Define process innovation.
Process innovation involves the improvement of existing processes or the development of new ones to increase efficiency and productivity.
30
What is creative destruction according to Schumpeter?
Creative destruction is the concept that innovation and technological change lead to the replacement of old technologies and products with new ones, leading to economic growth.
31
Differentiate between static and dynamic efficiency.
Static efficiency is the optimal allocation of resources at a specific point in time; dynamic efficiency refers to the long-term allocation of resources and continuous improvement.
32
Fill in the blank: Dynamic efficiency emphasizes _______.
[innovation, adaptability, and continuous improvement]
33
What does static efficiency focus on?
Static efficiency focuses on optimising existing resources and processes, efficiency, and cost reductions.
34
What are the characteristics of perfect competition?
* Large number of buyers and sellers (firms)
* Homogenous (identical) products
* Perfect information
* No barriers to entry or exit
* Firms are price takers
35
In perfect competition, what does it mean that firms are price takers?
Firms cannot influence the market price; demand to the firm is perfectly elastic (horizontal) and P=AR=MR
36
What happens to supernormal profit in the long run under perfect competition?
Supernormal profit is competed away
37
How does a firm maximize profit in perfect competition?
By producing the output Q where MC=MR
38
What occurs if a firm faces higher costs such that AC>AR?
The firm is making losses
39
Under what condition will a firm shut down in the short run?
If AR
40
What condition allows a firm to stay open in the short run?
If AR>AVC
41
What happens in the long run when new firms enter the market?
Market supply curve shifts right, market price falls to P2
42
What is the result of firms entering the market in the long run?
Profit-maximising output falls to Q2, where the firm is making normal profit only
43
What happens if firms were making losses in the short run?
Some firms would leave the market, and market supply shifts left
44
What is allocative efficiency in perfect competition?
P=MC; firms are allocatively efficient in both the short and long run
45
What defines productive efficiency in the long run?
Firms produce where the AC curve is at its minimum
46
What is dynamic efficiency in the context of perfect competition?
Firms make homogenous goods with little scope for innovation
47
True or False: In the real world, firms in competitive markets are often very entrepreneurial and innovative.
True
48
Fill in the blank: In perfect competition, the firm's profit-maximizing output is where ______.
MC=MR
49
What does the firm experience if AR is greater than AC?
Profit per unit is positive
50
What occurs to market price when supernormal profits are present?
Market price tends to fall due to new entrants
51
What is a characteristic of a monopoly?
Single seller
## Footnote
Monopolies are defined by having only one seller in the market.
52
What type of products do monopolies sell?
Unique products (with no/few substitutes)
## Footnote
Monopolies offer products that have few or no alternatives available.
53
What is a key barrier to entry in a monopoly?
High barriers to entry
## Footnote
These barriers prevent new firms from entering the market.
54
In a monopoly, firms are considered what type of makers?
Price makers
## Footnote
Monopolies can set market prices but are constrained by demand.
55
What happens to demand when the price increases in a monopoly?
Lower quantity demanded
## Footnote
Demand slopes downwards to the right.
56
What is the relationship between Average Revenue (AR) and Marginal Revenue (MR) in a monopoly?
MR is twice as steep as AR
## Footnote
This reflects the pricing strategy of a monopoly.
57
Can a monopoly earn supernormal profit in the long run?
Yes, due to high barriers to entry
## Footnote
Monopolies can maintain supernormal profits over time.
58
What is the output level where a monopolist maximizes profit?
Where MC=MR
## Footnote
This is the equilibrium point for profit maximization.
59
What does AR represent in a monopoly's profit calculation?
Average Revenue
## Footnote
AR is the revenue earned per unit sold.
60
What condition leads a monopolist to shut down in the short run?
If AR < AVC
## Footnote
The firm must cover its variable costs to remain operational.
61
What happens to a monopolist that incurs losses in the short run?
It may shut down in the long run unless conditions improve
## Footnote
A firm must either increase demand or reduce costs to survive.
62
What defines a natural monopoly?
A single firm can efficiently serve the entire market
## Footnote
This is often due to significant economies of scale.
63
What are high fixed costs relative to variable costs indicative of?
Natural monopoly
## Footnote
This characteristic supports the single-firm model of natural monopolies.
64
What is allocative efficiency in relation to monopolies?
P=MC
## Footnote
Monopolies are not allocatively efficient as P > MC.
65
Is a monopoly productively efficient?
No, it produces to the left of the minimum AC
## Footnote
This indicates inefficiency in production levels.
66
What can supernormal profits in a monopoly be used for?
R&D and innovation
## Footnote
This potential for reinvestment allows for dynamic efficiency.
67
True or False: A monopoly that does not innovate may lose its market dominance.
True
## Footnote
Lack of innovation can weaken barriers to entry.
68
What is the condition for a monopoly to choose its output?
MC = MR
## Footnote
This means the monopoly produces where marginal cost equals marginal revenue.
69
What price does a monopoly charge at its chosen output?
Pm
## Footnote
Pm is the price charged by the monopoly at the output level Qm.
70
In a competitive market, where does equilibrium occur?
D = Sc
## Footnote
This is at price Pc and quantity Qc.
71
What is the result of a monopoly restricting output?
Higher prices
## Footnote
This leads to a net welfare loss because the monopoly is not allocatively efficient.
72
What creates a net welfare loss in monopoly compared to competition?
Units valued more highly by consumers than marginal cost
## Footnote
This occurs between outputs Qm and Qc.
73
What assumption is made regarding marginal cost in monopoly analysis?
MCm = Sc
## Footnote
This means the cost structure faced by the monopoly is the same as in competitive firms.
74
What might happen if a monopoly gains economies of scale?
Lower price and higher output than under perfect competition
## Footnote
This can occur if Sc lies to the left of MCm.
75
What is the most productively efficient scale for a natural monopoly?
The largest scale
## Footnote
This allows the monopoly to gain economies of scale.
76
What are some disadvantages of monopoly?
Higher prices, loss of allocative efficiency, inequality, X-inefficiencies, diseconomies of scale, lack of choice, monopsony power, supernormal profit
## Footnote
Each of these aspects contributes to the overall inefficiency of monopolistic markets.
77
What is a key advantage of monopoly in terms of profit?
Supernormal profit
## Footnote
This can be used for capital investment and innovation.
78
How can a monopoly contribute to economies of scale?
By having much lower costs than an industry made up of smaller firms
## Footnote
This is particularly true for natural monopolies.
79
What advantage does monopoly have in international markets?
Increased international competitiveness
## Footnote
A domestic monopoly with economies of scale can compete more successfully on price.
80
What role does regulation play in monopolies?
Ensures monopolies do not exploit consumers and maintain quality
## Footnote
Regulation can prevent excessive pricing strategies.
81
Fill in the blank: Monopolies can enable _______ which helps lower-income families.
price discrimination
## Footnote
This can allow for certain services to be provided free to some consumers.
82
What are the characteristics of monopolistic competition?
* Large number of buyers and sellers (firms)
* Differentiated products
* Low barriers to entry or exit
* Firms are price makers
83
In monopolistic competition, why can firms influence the market price?
Because products are not identical; demand to the firm slopes downwards to the right and MR is twice as steep as AR.
84
What happens to supernormal profit in the long run in monopolistic competition?
It is competed away.
85
What is the significance of low barriers to entry in monopolistic competition?
They enable firms to join easily and compete in the market.
86
In the short run, how does a firm maximize profit in monopolistic competition?
The firm will produce output Q where MC=MR and charge price P according to the demand curve.
87
What does it indicate if AR is greater than AC at output Q in monopolistic competition?
Profit per unit is positive.
88
What is the relationship between AC and AR if a firm is making losses?
AC > AR at the output where MC=MR.
89
When will a firm shut down in the short run?
If AR < AVC.
90
What condition allows a firm to stay open in the short run?
If AR > AVC.
91
What happens in the long run when new firms enter the market in monopolistic competition?
Demand for existing firms shifts inwards, reducing their profit-maximizing output.
92
What is the new profit-maximizing output for existing firms after new firms enter the market?
At MC=MR2.
93
What is the outcome for existing firms when supernormal profit is competed away?
They make normal profit only.
94
What is allocative efficiency in the context of monopolistic competition?
P > MC; firms are not allocatively efficient.
95
What does productive efficiency refer to in monopolistic competition?
Producing where the AC curve is at its minimum; firms are not productively efficient.
96
What is dynamic efficiency in monopolistic competition?
Supernormal profit is competed away in the long run, making it harder for firms to be dynamically efficient.
97
What benefit do consumers gain from monopolistic competition?
Product differentiation, leading to more choice.
98
How do firms attempt to create brand loyalty in monopolistic competition?
By advertising.
99
Fill in the blank: In monopolistic competition, firms are expected to advertise and aim to create _______.
[brand loyalty]
100
What are the characteristics of monopolistic competition?
* Large number of buyers and sellers (firms)
* Differentiated products
* Low barriers to entry or exit
* Firms are price makers
101
In monopolistic competition, why can firms influence the market price?
Because products are not identical; demand to the firm slopes downwards to the right and MR is twice as steep as AR.
102
What happens to supernormal profit in the long run in monopolistic competition?
It is competed away.
103
What is the significance of low barriers to entry in monopolistic competition?
They enable firms to join easily and compete in the market.
104
In the short run, how does a firm maximize profit in monopolistic competition?
The firm will produce output Q where MC=MR and charge price P according to the demand curve.
105
What does it indicate if AR is greater than AC at output Q in monopolistic competition?
Profit per unit is positive.
106
What is the relationship between AC and AR if a firm is making losses?
AC > AR at the output where MC=MR.
107
When will a firm shut down in the short run?
If AR < AVC.
108
What condition allows a firm to stay open in the short run?
If AR > AVC.
109
What happens in the long run when new firms enter the market in monopolistic competition?
Demand for existing firms shifts inwards, reducing their profit-maximizing output.
110
What is the new profit-maximizing output for existing firms after new firms enter the market?
At MC=MR2.
111
What is the outcome for existing firms when supernormal profit is competed away?
They make normal profit only.
112
What is allocative efficiency in the context of monopolistic competition?
P > MC; firms are not allocatively efficient.
113
What does productive efficiency refer to in monopolistic competition?
Producing where the AC curve is at its minimum; firms are not productively efficient.
114
What is dynamic efficiency in monopolistic competition?
Supernormal profit is competed away in the long run, making it harder for firms to be dynamically efficient.
115
What benefit do consumers gain from monopolistic competition?
Product differentiation, leading to more choice.
116
How do firms attempt to create brand loyalty in monopolistic competition?
By advertising.
117
Fill in the blank: In monopolistic competition, firms are expected to advertise and aim to create _______.
[brand loyalty]
