3.4 market structures

• What is efficiency used to judge in a market?


  How well the market allocates resources
• What is allocative efficiency?


  It is when resources are used to produce goods that consumers value most highly
• When does allocative efficiency occur?


  When the value to society from consumption equals the marginal cost of production
• What is the condition for allocative efficiency in terms of price and marginal cost?


  P = MC

  
• What is productive efficiency?


  A firm has productive efficiency when it produces at the lowest average cost
• What is the relationship between productive efficiency and the average cost curve?


  Productive efficiency occurs when firms produce at the bottom of the AC curve
• What is the condition for productive efficiency in terms of marginal cost and average cost?

  MC = AC
• What is technical efficiency?


  Producing a given output with minimum inputs
• Can a technically efficient firm be productively efficient?


  No, not all technically efficient firms are productively efficient
• What is dynamic efficiency?


  It is when resources are allocated efficiently over time
• What are examples of static efficiency?


  Allocative and productive efficiency
• What is required for dynamic efficiency to be achieved in markets?


  Competition that encourages innovation
• What is X-inefficiency?


  When a firm fails to minimize its average costs at a given level of output
• What causes X-inefficiency?


  A lack of competition leading to little incentive to cut costs
• If a firm produces 125 goods at a cost of £8 each instead of £7, what type of inefficiency is it experiencing?


  1. inefficiency
• What is perfect competition?


  A market with a high degree of competition
• Does perfect competition guarantee maximum welfare?


  No, it does not necessarily produce ideal results
• What is an example of a market that may fit perfect competition?


  Agriculture
• What are the four key characteristics of perfect competition?


  Many buyers and sellers, freedom of entry and exit, perfect knowledge, and homogenous products
• What does it mean for demand to be perfectly elastic in perfect competition?


  Prices are solely determined by the interaction of demand and supply
• What does it mean for firms to be price takers?


  They cannot influence the market price

  
• Why is freedom of entry and exit important in perfect competition?


  It prevents firms from making huge profits in the long run
• What does perfect knowledge in perfect competition imply?


  Firms know when others are making profits, attracting them to the market
• What is the significance of homogenous products in perfect competition?


  It means consumers cannot differentiate between products from different firms
• What is the profit-maximizing equilibrium condition for firms in perfect competition?


  Firms produce where MC = MR
• What can firms in perfect competition earn in the short run?


  Normal profit, supernormal profit, or a loss
• What is the long-run equilibrium condition for firms in perfect competition?


  Firms make normal profits
• What is the relationship between perfect competition and static efficiency?


  Perfect competition is both allocatively and productively efficient, thus static efficient
• Why are firms in perfect competition not dynamically efficient?


  No single firm has enough resources for research and development
• What lies between perfect competition and monopoly?

  Monopolistic competition
• What are some examples of firms in monopolistic competition?


  Hairdressers, estate agents, and restaurants
• What is a characteristic of monopolistic competition regarding buyers and sellers?


  There must be a large number of buyers and sellers, each acting independently
• What is the significance of no barriers to entry or exit in monopolistic competition?


  It allows new firms to enter when supernormal profits are made
• How do firms in monopolistic competition differ from those in perfect competition?


  Firms produce differentiated, non-homogenous goods or services
• What is the profit-maximizing equilibrium condition for firms in monopolistic competition?


  Firms produce at MC = MR in the short run
• What happens to firms in monopolistic competition in the long run?


  They can only make normal profits due to new entrants
• What is a limitation of the monopolistic competition model?


  Information may be imperfect, affecting market entry predictions
• Why are firms in monopolistic competition not allocatively or productively efficient?


  Because MR does not equal AR, so AC cannot equal MC
• What is the dynamic efficiency of firms in monopolistic competition?


  They are likely to be dynamically efficient due to differentiated products
• How does monopolistic competition compare to perfect competition in terms of sales and prices?


  Less is sold at a higher price in monopolistic competition