How does market structure affect businesses?

Flash cards for Edexcel Economics and business unit 2B, How does market structure affect businesses?

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Why is competition a good thing?
Encourages price and non price competition which gives consumers better value for money. Also it allows market mechanisms to operate more freely and allocate resources more efficiently.
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What are the characteristis of a competitive market?
Vigorous competition for market share, prices driven down gives value for money, costs kept to minimum by minimising waste and good managment, better quality goods+customer service, stimulated innovation, more choice,inefficient businesses lose sales
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What is technical or productive efficiency?
When production is taking place at the minimum average costs. Every effort is being made to reduce costs by searching for best value inputs and organising employees so that no time is wasted.
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What is allocative efficiency?
When resources are used to yeil the maximum benefit to everyone. It is impossible to redistribute without making someone worse off. It is associated with consumer sovereignty and efficent markets. Goods produced closely suit consumers needs.
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What prevents efficiency?
Barriers to entry, government intervention, imperfect knowledge.
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What are barriers to entry?
Factors that prevent businesses from entering a market. Inc ontrast easy entry means few difficukties stand in the way. In high barrier to entry marjets there is less competition.
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List some possible barriers to entry?
The needs for an established brand or reputation, presence of large established businesses in the market, strong brand loylty, patents, collusion, retaliation from existing firms.
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What is collusion?
When businesses agree with one another to avoid competition. Could agree to not cut prices, or to share different parts of the market. It is illegal but still happens.
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What is price taking?
When businesses can only charge the going rate in the market, the price is beaten down to a point it is just covering costs of production.
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What is price making?
Businesses can choose between different pricing stratagies. Depending on their position in the market. If they can raise prices provided they maintain the quality they have some market power.
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What are the positives of online retailing for consumers?
Greater convenience, greater choice, more price transparency, access to new products and services.
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What are the negatives of online retailing for consumers?
No all can or will use online retailing, increased risk of fraud.
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What are the positives of online retaiing for businesses?
Small business can reach global markets, online sales can be added to existing sales channels, oppertunity to expand market beyond physical limits.
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What are the negatives of online retailing for businesses?
Increased competition from global online sources, may lose share from conventional areas, may have to lower prices due to increased consumer knowledge.
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What factors affect market structure?
Number of businesses in the market, the amount and type of the competition, nature of the product, degree of power each business has, degree of power consumers have, profit levels, business behaviour, barriers to entry and exit, impact on efficiency.
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What is perfect competition?
When there is many small businesses selling the same product. All will be price takers.
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What is a pure monopoly?
When one firm has 100% of the market and no other firm exists. It is a theoretical idea and helps define the spectrum of competition.
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What is spectrum of competition?
Shows the whole range of market structures.
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What is imperfect competition?
When all market structures except perfect competition are lumped together.
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What are the characteristics of a business having monopoly power?
The ability to affect price levels- can charge high prices or low to remove smaller rivals, the ability to restrict output, ability to affect outcomes in the market and dictate what happens, high barriers to entry, less choice, higher profits
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What is normal profit?
Level of profit needed to keep a business in operation by only covering the costs of production but no more.
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What is abnormal profit?
A level of profit above normal profit. The closer a market gets to a monopoly the greater the level of abnormal profit that can be made. The greater the barriers to entry the greater the levels of abnormal profit that can be made.
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What is a legal monoploy?
When a firm has 25% of the market- above this the competition commission can intervene if they think the business is acting against public interest.
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What is a natural monopoly?
When it would be wasteful to have more than one business providing a service.
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What is X-inefficiency?
Happens when there is a lack of competition in a market, and the dominent firm has little or no incentive to control costs or resource use.
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What is a duopoly?
When two large firms dominate a market.
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What is an oligopoly?
When several large firms dominate the market.
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What are the characteristics of an oligopoly?
Non-price competition, have considerable power, competing on prices is usually avoided, many smaller firms, danger of collusion, high barriers to entry, abnormal profits.
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What is the concentration ratio?
Measures the extent to which a market or industry is dominated by a few leading firms.
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When does an oligopoly exist?
When the biggest five firms hold for 60% of the market share.
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What is predatory pricing?
When businesses try and undercut competitors that have higher costs than they do, charging prices at which the competitor can't survive.
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What is monoplostic competition?
When there are many firms in the market offereing a slightly differentiated product and all competing with eachother.
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What are the features of monopolistic competition?
There are many firms producing similar products, many consumers and producers, low concentration ratio, consumers are aware of price differences, low barriers to entry or exit, producers have some control over prices, some abnormal profit.
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What is perfect competition?
It is a theoretical idea, it is a model that defines the greatest possible degree of competition. IT implies a market with countless buyers and sellers with identical products.
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What are the features of perfect competition?
The product is homogenous- meaning that every supplier sells identical products and it is impossible to tell the difference, many buyers and sellers who can't influence the price, price takers,no barriers to entry,perfect knowledge,only normal profit
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What are the advantages of oligopolies?
Can afford innovation wich can require lots of capital, we rely on big businesses to innovate and release new products. BIg producers will be able to cut costs due to economies of scale.
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What is a contestable market?
When entry is easy enough for abnormal profit to attract newcomers.
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Other cards in this set

Card 2

Front

What are the characteristis of a competitive market?

Back

Vigorous competition for market share, prices driven down gives value for money, costs kept to minimum by minimising waste and good managment, better quality goods+customer service, stimulated innovation, more choice,inefficient businesses lose sales

Card 3

Front

What is technical or productive efficiency?

Back

Preview of the front of card 3

Card 4

Front

What is allocative efficiency?

Back

Preview of the front of card 4

Card 5

Front

What prevents efficiency?

Back

Preview of the front of card 5
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