3.4 market structure

• What is efficiency used to judge in the market?

  How well the market allocates resources
• What does allocative efficiency achieve?

  Resources are used to produce goods and services 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 productive efficiency?

  A firm produces goods at the lowest average cost using the fewest resources
• What is the condition for allocative efficiency in terms of price and marginal cost?

  P = MC
• What is the relationship between marginal cost and average cost for productive efficiency?

  MC = AC

  
• When does productive efficiency exist?

  When firms produce at the bottom of the average cost curve
• 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?

  Efficient allocation of resources over time, focusing on investment and innovation
• What is static efficiency?

  Efficiency at a set point in time
• What are examples of static efficiency?

  Allocative and productive efficiency
• What is required for dynamic efficiency 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?

  Organizational slack and lack of competition
• 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 maximize welfare?

  No, it does not necessarily produce ideal results
• What is a characteristic of perfect competition regarding buyers and sellers?

  There must be many buyers and sellers
• What does it mean for firms to be price takers in perfect competition?

  Prices are determined by the interaction of demand and supply
• What is the significance of freedom of entry and exit in perfect competition?

  It allows firms to enter when profits are made and exit when losses occur
• What does perfect knowledge in perfect competition imply?

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

  Products that are identical and indistinguishable from one another
• What is the profit-maximizing equilibrium condition for firms in perfect competition?

  Firms produce where MC = MR
• What type of profit can firms in perfect competition make in the long run?

  Normal profit

  
• What happens to prices when firms in perfect competition make supernormal profits?

  New entrants increase supply, leading to a fall in price

  
• What is the relationship between price and average cost in perfect competition?

  Firms are allocatively efficient since they produce where P = MC
• Why are firms in perfect competition not dynamically efficient?

  No single firm has enough resources for research and development
• What is monopolistic competition?

  A form of imperfect competition with a downward sloping demand curve
• What is a characteristic of firms in monopolistic competition?

  They produce differentiated, non-homogenous goods or services
• What is the significance of barriers to entry in monopolistic competition?

  They allow new firms to enter when supernormal profits are made
• What happens to profits in the long run for firms in monopolistic competition?

  Only normal profits can be made

  
• What is the profit-maximizing equilibrium condition for firms in monopolistic competition?

  Firms produce at MC = MR
• What happens to demand for a firm in monopolistic competition when new firms enter the market?

  Demand for the individual firm decreases
• What is the 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?

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

  Firms may be dynamically efficient due to differentiated products
• How does monopolistic competition compare to perfect competition in terms of pricing and output?

  Less is sold at a higher price

  
• What is oligopoly?

  A market dominated by a few firms with a high concentration ratio
• What are the key characteristics of oligopoly?

  Products are differentiated, few firms dominate, firms are interdependent, and there are barriers to entry