Pack 8: Market Structures (Pt 1)

Question 1

What is allocative efficiency?

Answer 1

Market equilibrium is at the price that represents consumer preferences, (price = marginal costs)

Question 2

what is productive efficiency?

Answer 2

Business reaches the lowest point on its AC curve implying an efficient use of scarce resources, (minimum AC).

Question 3

What is X-inefficiency?

Answer 3

When a lack of effective competition in an industry means the costs are higher than in a competitive market.

Question 4

What is dynamic efficiency?

Answer 4

Economic efficiency improving over time, e.g. innovation and R&D

Question 5

What is perfect competition?

Answer 5

Market structure where there is a large number of buyers and sellers who are price takers and sell homogenous product and have low barriers to entry/exit

Question 6

Why would a firm shut down in the long run?

Answer 6

If price is below AC as the business will be making a loss

Question 7

Why would a firm shut down in the long but not the short-run?

Answer 7

If price is below AC but above AVC as they will be making a positive contribution to fixed costs making their loss smaller.

Question 8

Why would a firm shut down in the short-run?

Answer 8

If price is below AVC, will not be making a positive contribution back to fixed costs

Question 9

What is a pure monopoly?

Answer 9

One firm supplying all output within the market, without facing competition due to high barriers to entry. (100% market share)

Question 10

What is monopoly power?

Answer 10

Firms being able to control the price they charge in the market

Question 11

What percentage of market share must a firm have to be considered a legal monopoly?

Answer 11

25%

Question 12

What is a natural monopoly?

Answer 12

Due to internal economies of scale in industry, it’s best served by a single supplier. e.g. electricity

Question 13

What economic efficiencies will monopolies achieve?

Answer 13

~Dynamic efficiency
~X-inefficiency (possibility)

Question 14

What economic efficiencies will monopolies not meet?

Answer 14

~Dynamic
~productive

Question 15

What are the benefits of monopolies for firms?

Answer 15

~Can set higher prices and earn supernormal profits (benefits owners, investment and can offset short-term losses)
~Gain economies of scale
~Can compete internationally

Question 16

What are the costs of monopolies for firms?

Answer 16

~Face greater regulation and scrutiny
~May experience rising costs
~May not innovate could suffer from creative destruction

Question 17

What are the benefits to consumers of monopolies?

Answer 17

~Innovation and R&D (better product)
~Lower prices (economies of scale)
~Cross-subsidisation

Question 18

What are the costs to consumers of monopolies?

Answer 18

~Higher prices (allocative inefficiency)
~Lack of choice of quality products

Question 19

What are the benefits to employees of monopolies?

Answer 19

~High levels of employment + job security
~May gain higher wages and bonuses

Question 20

What are the costs to employees of monopolies?

Answer 20

~Fewer employment opportunities
~Exploitation by their employer

Question 21

What are the benefits to suppliers of monopolies?

Answer 21

~Higher sales/profit
~Long-term relationships

Question 22

What are the costs to suppliers of monopolies?

Answer 22

May be exploited (e.g. monopsony power)

Question 23

What is price discrimination?

Answer 23

Where a firm sells the same product at a different price in different markets

Question 24

What are the conditions that must be met for firms to successfully price discriminate?

Answer 24

~Two distinguishable markets with differing PED’s
~Market power
~No arbitrage

Question 25

How does price discrimination work?

Answer 25

~Increase price in inelastic market and decrease it in the elastic market, appropriating consumer surplus to increase revenue

Question 26

What are the benefits to producers of price discrimination?

Answer 26

+Increased total revenue and profit (owner benefit, investment and can offset short-term losses) +Can be used to prevent entry into market +Lower prices can boost customer loyalty

Question 27

What are the negatives to price discrimination for producers?

Answer 27

-Possibly higher costs, outweighs revenue increase -Increased chance of investigation by competition authorities

Question 28

What benefits of price discrimination for consumers?

Answer 28

+Some gain lower prices +Producers using monopoly profits to invest in innovation and R&D +May be more choice open to consumers

Question 29

What are the costs of price discrimination for consumers?

Answer 29

-Some will pay higher prices -Up profits may be used to strengthen barriers to entry and increase inefficiency

Question 30

What is profit maximisation?

Answer 30

Firm setting MR = to MC in order to maximise the difference between total revenue and total cost

Question 31

What is a realistic limitation of profit max.?

Answer 31

Difficult for managers to estimate MC and MR accurately

Question 32

What is revenue maximisation?

Answer 32

Where firm sets MR = to 0 in order to maximise total revenue gained

Question 33

Why might a firm decide to pursue a revenue max. objective?

Answer 33

~Benefits to managers ~Higher market share

Question 34

What is sales maximisation?

Answer 34

Where firm sets TR = TC (or AC = AR) in order to maximise sales without making a loss

Question 35

Why might a firm pursue a sales max. objective?

Answer 35

~Entry deterrence and long-run profit max. ~Social or ethical reasons

Question 36

What is satisficing?

Answer 36

Decision making strategy, aims for satisfactory or adequate result rather than the optimal solution

Question 37

What is profit satisficing?

Answer 37

Making sufficient profits to satisfy the demands of the shareholders

Question 38

Why might managers profit satisfice?

Answer 38

~More able to achieve other objectives ~To reduce effort required