3.3 - market structures

Created by

Maddie Jones

Cards (69)

What is an internal EOS? 
When the long-run average costs of production decrease as a firm increases in size.
What is an external EOS? 
When the long-run average costs of production decrease from firms as the whole industry increases in size.
What are examples of internal EOS's?
- technical economies
- marketing economies
- commercial economies
- managerial economies
- financial economies
- risk-bearing economies
What is the minimum efficient scale?
The output where the long-run average costs reach a minimum.
What are diseconomies of scale?
When an increase in the scale of production results in a less than proportionate increase in output, causing a rise in LRAC.
What are sources of diseconomies of scale?
- X-inefficiency
- poor communication
- demotivation
- poor coordination
What are types of external EOS? 
- improvements is transport that benefit all firms in a particular industry e.g. HS2
- skilled labour being attracted to a firm
- new methods of production
- firms benefitting from super-fast broadband.
what are types of external diseconomies of scale?
- higher costs if many forms want to locate in the same area
- congestion caused by an industry growing rapidly in one area.
- increased demand from resources demanded by the industry when the industry grows.
What is profit? 
Difference between revenues and costs. Reward from risk-taking
When does normal profit occur? 
When AC = AR or TC = TR. Doesn't act as a signal for other firms to enter market but doesn't cause firms to leave.
What is supernormal profit?
Profit above maximum required to stay in business. Difference between AR and AC.
What is the break-even level of output?
Where no supernormal profits or losses are made. Where TC = TR and AC = AR
what is the shut-down point?
Price = AVC, if AVC isn't covered, the firm will close down in the short-run.
What is efficiency? 
How well resources are used
What is allocative efficiency?
P = MC, people pay exactly the amount it costs to produce the last unit.
What is productive efficiency?
When firm operated where AC is lowest, lowest price the customer can enjoy.
What is dynamic efficiency?
When firm uses all resources more efficiently and productively over time
How can dynamic efficiency be achieved?
- innovation
- investment in new production processes
- investment in human capital through training
- improvements in working practises and labour relations
What is X-inefficiency? 
When costs rise b/c there is a lack of competitive pressure in a market. Little incentive to minimise costs.
Which market structure is allocatively efficient in the long run?
Perfect competition
Which market structure is productively efficient in the short and long run?
Perfect competition
Which is the most competitive market structure?
Perfect competition
Which is the least competitive market structure?
Monopoly
What are the characteristics is perfect competition?
- many buyers and sellers
- firms are price takers
- homogenous goods
- no barriers to entry or exit
- perfect knowledge/info
- all firms aim to max profits
What are the characteristics of monopolistic competition?
- many buyers and sellers
- differentiated goods
- firms are price makers
- low barriers to entry and exit
- firms aim to max profits
- some brand loyalty but no strong brand loyalty
What are the characteristics of an oligopoly?
- high barriers to entry and exit
- high concentration ratio
- interdependent firms
- product differentiation
What are the highest five-firm concentration ratios?
- sugar
- tobacco
- confectionery
- man-made fibres
- soft drinks and mineral waters
What is collusion? 
When firms collaborate with other firms in the market to reduce output or increase profits
What are reasons for collusive behaviour?
- it enables firms to increase their profits
- firms don't believe that their collusion will b discovered by the regulator
What are reasons for non-collusive behaviour?
- no trust between firms in the market
- a possibility of new entrants in the market
- high penalties for being found guilty of collusion
What is overt collusion? 
Direct contact between firms, formal agreement among by firms to control the market by fixing prices, allocating customers or rigging bids for contracts. Illegal and easier to detect than tacit.
What is tacit collusion?
Firms act individually but jointly exercise market power with other competitors. Unspoken agreement with nothing in writing. Illegal but very hard to control.
What are cartels? 
Firms act as a monopoly through an agreement and limit output to manipulate pricing. Form of overt collusion.
What is price leadership?
Dominant firm acts to change prices and others follow
What is game theory?
The study of strategies used to make decisions. Used to evaluate the actions of firms in oligopoly. A set of ideas that looks for strategies firms use to make decisions like for prices or levels of advertising.
What is the simple pay-off matrix?
A simple two-firm, two-outcome model. Supports why firms may collude and form a cartel but also why there is an incentive for it to be broken.
What are types of price competition?
- price wars
- predatory pricing
- entry limit pricing
What are price wars?
When price cutting leads to retaliation and other firms cut prices, meaning the original firms again want to cut prices to increase their sales.
What is predatory pricing?
Cutting prices below the average cost of production to force other firms out of the market and then raise prices again. Only short term measure. Almost always illegal
What is entry limit pricing?
Cutting the price to the point that deters away new entrants into the market. May also be used to discourage incumbent firms from expanding. May or may not be illegal depending on the specific cases looked at by the competition authorities.