Market Structures

• Efficiency is used to judge how well the market allocates resources
• Allocative efficiency occurs when resources are used to produce goods and services consumers value
• Allocative efficiency occurs when P=MC
• A firm is productively efficient when its products are produced at the lowest average cost
• MC=AC is a condition for productive efficiency in the short run
• Dynamic efficiency is achieved when resources are allocated efficiently over time
• Static efficiency refers to efficiency at a set point in time
• X-inefficiency occurs when a firm fails to minimise its average costs
• Perfect competition maximizes welfare or produces ideal results

  False
• In perfect competition, firms are price takers
• Freedom of entry and exit is a characteristic of perfect competition
• Perfect knowledge in perfect competition ensures firms have the same production techniques
• Homogenous products are identical in perfect competition
• Steps in the profit-maximizing equilibrium process in perfect competition

  1️⃣ Firms produce where MC=MR

  2️⃣ Supernormal profits attract new entrants

  3️⃣ Supply increases, price falls

  4️⃣ Normal profits are achieved in the long run
• In perfect competition, firms are productively efficient because they produce where MC=AC
• Perfect competition is allocatively efficient because P=MC
• Perfect competition is not dynamically efficient due to a lack of investment
• Monopolistic competition lies between perfect competition and monopoly
• In monopolistic competition, firms produce differentiated, non-homogenous goods
• Steps in the profit-maximizing equilibrium process in monopolistic competition

  1️⃣ Firms produce where MC=MR

  2️⃣ Supernormal profits attract new entrants

  3️⃣ Demand for the firm decreases

  4️⃣ Normal profits are achieved in the long run
• Firms in monopolistic competition are allocatively efficient in the long run

  False
• In monopolistic competition, firms are dynamically efficient because they innovate to gain a competitive edge
• The N-firm concentration ratio measures the percentage of market share
• What is the key characteristic of an oligopoly in terms of the number of firms dominating the market?

  A few
• One key characteristic of oligopoly is that products are generally differentiated
• A high concentration ratio in an industry indicates that a small number of firms control a large market share.
• What does it mean for firms in an oligopoly to be interdependent?

  Actions affect each other
• Barriers to entry are a key characteristic of oligopoly
• What does the concentration ratio measure in an industry?

  Market share of firms
• The 3 firm concentration ratio shows the percentage of the total market held by the three biggest firms
• What is the term for firms making collective agreements to reduce competition?

  Collusion
• Collusion reduces the fear of competitive price cutting or advertising, which in turn increases industry profits
• Why might firms in an oligopoly choose not to collude despite the risks?

  Collusion is illegal
• Collusion between firms works best when they are secretive about costs and production methods.

  False
• In tacit collusion, there is no formal agreement
• What is the formal term for a group of firms that agree to mutually set prices?

  Cartel
• The more successful a cartel, the greater the incentive for firms to break it.
• Match the type of tacit collusion with its description:

  Price leadership ↔️ Dominant firm sets prices

  Barometric firm ↔️ Predicts industry moves
• Game theory is used to examine the best strategy a firm can adopt for each assumption about its rivals
• A maximin strategy involves choosing the option with the best possible outcome.

  False