3.4 Market structures

• What are characteristics of perfect competition?

  • Identical selling goods
  • Perfect information
  • Freedom of entry/exit
  • Larger number of buyers and sellers
  • Price set by demand and supply
• What is demand in perfect competition?

  Perfectly elastic = D = AR = MR
• What are consumer costs for a monopoly?

  • Less choice: Large firms keep to the brans that make the most profit
  • Higher prices: Monopolists can restrict supply and raise prices to maximise their profits
  • Lower quality: Firms with no competition might not have the incentive to produce high quality goods
  • X-Inefficiency: Results in higher costs for the business and higher prices for the consumer
• What are workers benefits of a monopoly?

  • Better job security: Facing no competition, monopolises are likely to have a steady demand for their goods and services
  • Higher pay and/or perks for the workers: Higher profits might mean that the firm can afford to pay higher wages to its workers
• What are government benefits to a monopoly?

  • Higher tax revenue: Large firms pay higher rates of corporation tax. The more profit the monopoly makes, the more the firm will pay in tax
  • Lower unemployment: Monopolies might have many competitors outside the country. Monopoly power helps to keep jobs within the country. This may also improve the balance of payments
• What are characteristics of a monopoly?

  • Firm has more than 25% market share
  • High barriers to entry
• What are characteristics of monopolistic competition?

  • Many producers and consumers
  • Product differentiation
  • Producers have some control over price
  • Barriers to entry and exit are low
• What is allocative efficiency?

  • Occurs when there is an optimal distribution of goods and services,
  • Occurs at the free market equilibrium when the demand is equal to the supply
  • P = MC
• What is productive efficiency?

  • Production is achieved at the lowest cost possible
  • MC = AC
  • A firm is fully able to exploit potential economies of scale
• What is dynamic efficiency?

  Refers to the ongoing adaptation and improvement of products services and process to meet changing market demand and conditions
• What are characteristics of dynamic efficiency?

  • About long term growth and development
  • Linked to the pace of innovation
  • Ability of a business to respond to market changes, innovate, and improve overtime, so that it can remain competitive
  • Create substantial growth and value for the company and its stakeholders
• What are examples of dynamic efficiency?

  • Technology: have the potential to revolutionise the way businesses operate, leading to increased efficiency and productivity
  • Healthcare: new innovations can helped streamline the processes, reduce errors and improve patient outcomes
  • Renewable energy: lead to major improvements in the energy industry
• What is process innovation?

  Refers to the improvement of existing processes or the development of new ones to increase efficiency and productivity
• What are the types of process innovation?

  • Lean manufacturing: Focuses on eliminating waste and streamlining production processes to improve efficiency and reduce costs
  • Just in time production: Companies produce products only where there is demand rather than stockpiling inventory to help reduce waste and improve efficiency 
• What is x-inefficiency?

  • Happens when average costs are higher than they would be if the market was more contestable
  • Leads to a loss of technical/productive efficiency 
• What is a monopoly?

  A firm that has 25% or more of the market share
• What are characteristics of a monopoly?

  • Small amount of sellers
  • High barriers to entry/exit
  • Price controlled by producers
  • Asymmetrical information
• What is monopolistic competition?

  A form of imperfect information
• What are characteristics of monopolistic competition?

  • Many producers and consumers
  • Product differentiation
  • Low barriers to entry and exit
  • Producers have some control over price
• What profit does monopolistic competition cause in the short run?

  Abnormal profit
• What profit does monopolistic competition cause in the long run?

  Normal profit