A2 Micro Evaluation

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Perfect Competition

  • homogenous products
  • low barriers to entry
  • large number small firms
  • intensive competition
  • price takers 

theoretical market as never reallly happens normalyy jsut used to compare against others 

time frame - SR

  • in SR the outcome of perfect comp from firms pers is uncertain 
  • is possible to get normal profits, supernormal and economic loss
  • all depends on the market the firm is in and the goods they are producing as this determined AC curve and prevailing market price of the good being prodced
  • to make super depends how quickly new firms can enter the market to errode existing firms super normal profits 
    • agricultural market whose produce takes over 1 year to grow will not be affected till the crops grow a year later 
    • in others may be wiped out much quicker

LR outcome more certain

  • all firms will make normal profits 
  • surplus will be maximised 

Efficiency gains

  • productively efficient as firms operate at the minimum of the av cost curve BUT only in LR
  • firms profit maximise where MR=MC therefore p+MC so yes to allocative efficiency BUT only if there are no negative externalities present 
  • does not achieve dynamic efficiency as they are not making supernormal profit that ables them to make projects having R+D - potential impact on growth as investment drives growth rate
  • x-efficiency is achieved as they do not suffer from inefficiencies in the production process 

Monopolies

  • market dominated by single firm
  • price setter

Efficiencies

  • productively inefficient as does not produce at minimum AC
  • not allocatively efficienct as it does not produce where p=mc 
  • are dynamically efficient - they can make supernormal profits means they are able to afford investment in R+D which competitive firms may not be able to do. this creates better products. 
  • dynamic - people considering whether to invest in R+D but are not a monopoly already but they know if can create a product gd enough to earn monopoly power they will then earn supernormal p - its the prospect of supernormalprofits which acts as an incentive to innovate and invent which leads to dynamic efficiency

to eval - discuss when the efficiencyes are important

  • dynamic effects unimportant
    • monopoly market structure is worse than perfect comp 
  • dynamic effects important
    • monopoly better than perf comp 
  • how much scope for innovation and invesntion is there in an industry???
    • hairdressing - doesnt need huge amount of innovation and so dynamic unimportant 
    • self driving cars- need to be created so monopoly better than perf comp, when invention comest rhough will be making supernormal profits as a monopoly, no incentive if would be a perfect comp

Evaluate the appropriateness of a monopoly as a market structure in a modern developed economy

  • to get high marks need to give a nuanced answer 
  • the appropriateness of monoply varies from industry to industry depending on the importance of innovation and invention 

natural monopoly may be useful to introduce when talking about the effectiveness of the monopoly

Oligopolies

  • small number of large firms dominting market
  • comptition
  • differentiated products
  • high level of…

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