Market Structures and Leisure Markets: OCR Unit 3

What are Short Run Costs
When at least one FoP(usually capital) is in fixed supply
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Fixed Costs…
don’t change in the SR when output changes
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Variable Costs…
change with output
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Can all costs be categorised into FC or VC
some costs like labour can be difficult to categorise, depends on if cost changes as output changes (i.e. overtime and bonuses)
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Total Costs (TC) =
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Average Cost is…
cost per unit, TC/Q, can be split into AVC and AFC in the SR, AVC falls first and then rises (EOS)
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Marginal Cost is…
Change in TC by 1 unit increase in Q, influences AC proportionally, MC cuts AC and AVC at lowest points
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What are long run costs?
Possible to change all FoP, so all costs are variable. AC curve shown in EoS
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Describe EOS and DEOS graph
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Describe EOS graph
Downsloping Curve
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Describe EOS then constant returns to scale graph
Downsloping then flat
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EOS are…
Benefits in the form of lower LRAC from an increase in scale of production
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DEOS are…
disadvantages if a firm gets too big.
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Types of EOS
Purchasing (Bulk Buy); Selling( better sales and distribution facilities); Technical(High qual & efficient tech); Managerial (specialised Staff); Financial(easy funding); Risk Bearing (range of products spread risk)
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Nature of revenues
TC rise with output but TR depends on PED. MR positive=Elastic PED, MR=0=>unitary PED, Negative MR =inelastic, TR max when MR=0
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Influence on Revenue inc…
Market Power, consumer income, compliments and substitutes and other factors like weather
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Influences of Market Power on Revenue
Market Power up=>greater change P due to change in Q, depend on PED; can use pred pricing to increase TR in LR
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Influence of increase in Consumer income on revenue
Depends on YED. YED negative => fall, YED normal=> slight increase, Luxury=> sig increase
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Influence of Change in complimentary goods
increase of P of Compliment=>lower TR of good
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Influence of change in Substitute goods
Increase in P of sub => increase TR of good
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Allocative Efficiency in market shown by…
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Productive Efficiency in market shown by…
Lowest point on AC
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X Efficiency in market shown by…
operating on AC curve
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Dynamic Efficiency in market shown by…
Supernormal profit made, provided reinvested in to R and D
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Objectives of Firms
Profit max; sales revenue max; sales max; Public sector objectives;Utility max; Profit satisficing
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How to profit max
Operate at MC=MR
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How to Sales revenue max
MR=0, to achieve growth, may be subject to min profit constraint
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How to sales max
AC=AR, highest Q but normal profit
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How to meet public sector objectives
meet economic/social/political objectives set by government
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what is Profit Satisficing
Any point profit is made, as information failure makes it hard to work out MC and MR
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Feature of PC
Lots of Firms; No barriers, Price Taker, No independence, No non price comp; Normal Profit, Homogenous Product, Perfect information
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Perfect Comp Objectives
Firms= Profit max(MC=MR); Consumers (Utility Max)
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PC graph
AC/MC/D=AR=MR meet at same point, D=MR=AR flat line at price(price takers)
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Efficiency in PC
Yes: Allocative, Productive, X…. No: Dynamic as no supernormal profit
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Barriers to Entry in Monopoly
EOS, Cost advantages independent of scale, Customer Loyalty, Network Effect, Sunk Costs
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Features of Monopoly
1 firms, Absolute barriers, price maker(=> Price discrimination), High independence(no comp); No non price comp; Supernormal Profit; No product diff, Downward sloping MR and D=AR, Comp from indirect subs, Monopoly rent seeking (maintain power)
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Benefits of Monopoly
innovation- SR innovation and copyright/patent/intellectual property allow Supernormal profit and also creates new markets for monopolistic, allowing firms to move into old markets; Schumpeter Theory,
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What is Schumpeter Theory
Monopolists have size capital and risk bearing ability to innovate, generate new products, and retain market power
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Issues with monopoly
Charge higher price and supply lower Q than PC; Deadweight welfare loss (Consumer Surplus falls, producer rises, some of market lost
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Deadweight welfare loss Monopoly Graph
((((Draw and check notes))))
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Monopoly Profit and loss diagrams
profit- Price above cost MC=MR, loss when Cost above price (used to pred price)
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Efficiency in Monopoly
Yes: Dynamic as supernormal profit provided it is reinvested in R&D. No- allocative P>MC, Productive Not lowest on AC, No X as not on AC curve
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Features of MonComp
Lots of small firms; No barriers; Price maker (low market power and high elastic makes difficult to price compete); Some independence; High non price comp(Advertising); SR abnormal, LR normal due to hit and run, slight product diff, operates at MC=MR
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MonComp SR graph
D curves more elastic than monopoly; Supernormal, AC lowest point, MC=AC=MR
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Moncomp LR graph
AC=AR normal profit, AC cuts MC at lowest point(not point of production), still MC=MR
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Issues of MonComp
Rarely at bottom of AC, differentiation has a cost; Inefficient as a cost of differentiation; Consumers happy to pay slightly more for more choice.
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Efficiency in Mon Comp
Yes - X as on AC curve; No- Allocative, P>AC; Productive AC not min; Dynamic, Normal profit
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Features of Oligopoly
Few Large, lots small; High Barriers(EOS, High advertising budgets); Price maker(Price Wars); Low independence (collusion and Comp); High non price comp; LR Supernormal profit; Some product diff. Try to Increase market power
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How do oligopolies try to increase market power
Collusion, Mergers and Acquisitions
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Why do firms collude?
Reduce uncertainty; increase SR supernormal profit
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When does collusion work best?
Small no of firms; Open about costs; Produce almost homogenous products; Protected by barriers to entry
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What is open collusion
Limits comp by; fixing prices, limiting promotion and setting production quotas. This creates cartel to maximise joint profit by creating monopoly (illegal in Uk as bad for consumers). But not max profit
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What is Tacit Collusion?
Legal -by watching prices and behaviour of competitors and then adopting similar or identical decisions Doesn’t max profit
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Types of Tacit Collusion
Dominant firm Price Leadership(PL) -market leader sets price; Barometric PL - follow most stable/reliable firm; Collusive PL - Informal cartel.
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What are collusive price strategies?
2 Types; Average cost Prices - ATC+ Agreed markup; Price benchmarks, series of preset prices where price depends on cost of production.
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Types of Collusive behaviour…
Open/ Tacit/ collusive pricing
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What do Non Collusive Oligopolies do?
Both price and Non price compete, avoid Price comp due to price wars. So non price comp important.
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What are Price Wars?
Fall in P => comp decreasing P, So original firm lowers P again and so on.
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Use of Game Theory in Oligopoly
Firms strongly consider decisions of other firms when making a decision and base decisions on hypothetical reactions of competitors
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Oligopoly Graphs
Kinked Demand Curve (above is elastic/below is inelastic); Broken MR curve: change of MC between gap doesn’t change P or Q. Operate at MC=MR, AC lowest point through MC. Supernormal profit is AC below production point
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Efficiency in Oligopoly
Yes: Dynamic - Supernormal Profit (if reinvested in R&D); No: Allocative(P>MC), X(supernormal profit). Productive depends on AC Curve
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What is contestability?
Potential Amount of competition
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What is a contestable market
A market in which there are no barriers to entry or exit and costs facing incumbent and new firms is the same
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Theory of Contestable markets states…
What firms have and how efficient they are depends on level of contestability
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Key Conditions of contestable markets
Absence of sunk costs; Access to tech; low consumer loyalty; Size of entry barriers are none existent or small
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What is hit and run competition?
Firms enter easily, make supernormal profit in SR, Leave easily. Makes market very responsive to changes in consumer demand.
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Contestable Market should benefit consumers by…
Being productive and allocative efficient
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Relationship between barriers and contestability?
Inverse, lower barriers= high contestability
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Other cards in this set

Card 2


Fixed Costs…


don’t change in the SR when output changes

Card 3


Variable Costs…


Preview of the front of card 3

Card 4


Can all costs be categorised into FC or VC


Preview of the front of card 4

Card 5


Total Costs (TC) =


Preview of the front of card 5
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