Economics 3.4 Market Structures

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Productive Efficiency
When a firm combines resources in such a way to produce a given output at the lowest average total cost.
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Dynamic Efficiency
Technological progressiveness, Process innovation and Product innovation
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Allocative Efficiency
When consumers pay a market price that reflects the private marginal cost of production. All that is produced is sold
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Shutdown Point
When total revenue is less than variable costs
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Shutdown Point Exception
If total revenue is greater than variable costs but smaller than total costs, they can continue in the short run
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Perfect Competition Characteristics
Price-takers, Products are homogenous, very few barriers to entry or exit, no SNP is made in the long term
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Monopoly
A single supplier in a market. A legal monopoly has 25% market share
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Monopoly Characteristics
Price maker (but can't charge too high), High barriers to entry
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Local Monopoly
The only supplier in an area
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Natural Monopoly
When there are high fixed costs of distribution and other barriers to entry and exit, e.g. BT
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Barriers to Entry
Sunk costs, Economies of scale, Legal barriers, Capital costs, Marketing barriers and Anti-competitive practises (collusion)
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Capital Costs
Start up costs for machinery, land etc
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Sunk Costs
Costs that cannot be recovered such as advertising, where money will not be directly paid back
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Advantages of Monopolies
Firms= price setting power, economies of scale. Consumers= Lower income customers have better access through price discrimination. Employees= employ a lot. Suppliers= big, reliable customer.
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Disadvantages of Monopolies
Firms: inefficient, receive heavy fines. Consumers= High prices, worse service. Employees= Low wages, no where to advance to. Suppliers= No price setting power, become reliant.
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Price Discrimination
The ability to charge different prices for the same product, e.g. toll bridges and theme parks
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Third Degree Price Discrimination
Charging a different price for different consumer groups, which is what monopolies do. E.g. peak and off-peak
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Monopolistic Competition
Where there are many buyers and sellers, but the products sold are slightly differentiated
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Characteristics of Monopolistic Competition
Normal profits in the long term, slightly differentiated products, lots of firms, low barriers to entry and exit, profit maximisers, elastic demand, allocatively and productively inefficient.
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Characteristics of an Oligopoly
Small number of large firms, Firms are interdependent, High barriers to entry and exit, Non-price competition.
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Overt Collusion
When firms make an active agreement between themselves to fix price or production
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Tacit Collusion
When firms collude without any formal agreement
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Game Theory
Analyses the interdependence between firms in an oligopoly by looking at the impact of a decision of one firm.
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Monopsony
When there is only one buyer in the market, e.g. Amazon, military
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Monopsony Power
A monopsony can demand lower prices as suppliers may not have a choice to sell elsewhere
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Benefits of Monopsonies
Firms= lower costs. Consumers= lower prices. Employees= more funds to pay staff. Suppliers= always have a sale.
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Drawbacks of Monopsonies
Firms= may drive supplier out of business and bad relationship with them. Consumers= lower quality. Employees= lack of ethics may demotivate. Suppliers= may be exploited and therefore driven out of the market
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Limit Pricing
When a firm sets a low enough price to deter new entrants
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Contestable Markets
Industries with freedom to enter and exit the market
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Characteristics of Contestable Markets
Freedom to enter and exit, No sunk costs, No collusion, Perfect knowledge, Access to equal technology and skilled labour, No economies of scale, Normal profits in the long run.
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Degree of Contestability
There is no such thing as a perfectly contestable market: they can only be contestable to an extent
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Sales Maximisation Pricing
Sells as much as possible without making a loss. AC=AR
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Revenue Maximisation Pricing
Sells at a price which achieves the greatest revenue. MR=0
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Productive Efficiency Pricing
When a good is produced at the lowest possible cost (Price=MES)
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Price Skimming
Set a higher initial price for customers who are not willing to wait for a cheaper price of the product
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Other cards in this set

Card 2

Front

Technological progressiveness, Process innovation and Product innovation

Back

Dynamic Efficiency

Card 3

Front

When consumers pay a market price that reflects the private marginal cost of production. All that is produced is sold

Back

Preview of the back of card 3

Card 4

Front

When total revenue is less than variable costs

Back

Preview of the back of card 4

Card 5

Front

If total revenue is greater than variable costs but smaller than total costs, they can continue in the short run

Back

Preview of the back of card 5
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