Economics-3.4 revision

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Gve 8 barriers to enter a market?
Capital costs/ Sunk costs/ Scale economies/ Natural cost advantages/legal barriers/marketing barriers/limit pricing/anti-competitive practices.
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What are sunk costs?
Costs of production which are not recoverable if a firm leaves the industry e.g advertising.
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What is perfect competition?
A market structure where there are many buyers and sellers, where there is freedom of entry and exit to the market, where there is perfect knowledge and where all firms produce a homogenous product.
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What is imperfect competition?
A market structure where there are a large number of firms in the industry, each which has the ability to control the price that it sets for its products.
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What is a price taker?
A firm which has no control over the market price and has to accept the market price if it wants to sell its product.
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What is monopolistic competition?
A market structure where a large number of small firms produces non-homogenous products and where there are no barriers to entry or exit.
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What is an oligopoly?
A market structure where there is a small number of firms in the industry and where each firm is interdependent with one another, creating uncertainty. Barriers to entry are likely to exist.
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What is limit pricing?
When a firm, rather than short run profit maximising, sets a low enough price to deter new entrants from coming into its market.
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What is a cartel?
A formal agreement between firms to limit competition in the market, for example by limiting output in order to raise prices.
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What is meant by collusion?
Agreements between firms that restrict competition. Can be either overt or tacit.
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What is meant by overt collusion?
When firms make agreements among themselves to restrict competition, typically by reducing output, raising prices and keeping potential competitors out of the market. Example- Cartel.
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What is predatory pricing?
A pricing strategy where a firm lowers its prices when a new entrant comes into the market in order to force the competitor out of the market, and then putting up prices after.
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What is meant by tacit collusion?
When firms collude without any formal agreement having been reached and where there is no communication between firms. Example-Price leadership.
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What is game theory?
The analysis of situations in which players are interdependent.
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What is a monopolist?
A firm which controls all the output in a market.
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What is price discrimination?
Charging a different price for the same good or service in different markets.
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What is a monopsony?
When there is only 1 buyer in the market. For example amazons buying power in the book market.
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Where does productive efficiency occur?
It occurs when a firm is combining resources in such a way as to produce a given output at the lowest possible average total cost. ATC=MC.
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Where does allocative efficiency occur?
It occurs when consumers pay a market price that reflects the private marginal cost of production. P=MC.
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Describe what occurs if P is not equal to MC in allocative efficiency?
If P is not equal to Mc then there would be either excess supply or excess demand. In each case there is a misallocation of resources. Allocative inefficiency can lead to welfare losses.
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What is first degree price discrimination?
When a firm charges a different price for every unit consumed. The firm is able to charge the maximum possible price for each unit which enables the firm to capture all available consumer surplus for itself.
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What is second degree price discrimination?
Charging a different price for different quantities, such as quality discounts for bulk purchases.
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What is third degree price discrimination?
Charging a different price to different consumer groups. For example cinema goers can be divided into adults and children-Children cheaper.
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What are the beneifts of price discrimination to consumers?
Some consumers are brought into the market who before might not have been able to afford the product/Profits made by firms may finance research and development projects.
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Give advantages of monopolies?
Supernormal profit means finance for investment etc/ price discrimination my raise total revenue/economies of scale/ avoid a misallocation of resources.
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Give disadvantges of monopolies?
supernormal profit means less incentive to be efficient and to develop new products/ higher prices and lower output for domestic consumers/ may undertake price discrimination to raise producer surplus and reduce consumer surplus.
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What is a contestable market?
Contestable markets are industries with freedom to enter and exit the market, which allows firms to compete with one another.
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Give characteristics of a contestable market?
Freedom to enter + exit market/Absence of sunk costs/Firms compete and do not collude/Perfect knowledge/Absence of scale economies.
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What are the drawbacks of monopolies?
Productively + allocatively inefficient/ No need for a monopoly to innovate/ No need to increase efficiency, so x-inefficiency can remain high/ Consumer choice is restricted/ Monopsonist power may be used to exploit suppliers
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Other cards in this set

Card 2

Front

What are sunk costs?

Back

Costs of production which are not recoverable if a firm leaves the industry e.g advertising.

Card 3

Front

What is perfect competition?

Back

Preview of the front of card 3

Card 4

Front

What is imperfect competition?

Back

Preview of the front of card 4

Card 5

Front

What is a price taker?

Back

Preview of the front of card 5
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