Economics 3.4 Market Structures Flashcards

This set of vocabulary flashcards covers market structures, efficiency types, pricing strategies, and competition theories based on the A Level Edexcel Economics curriculum.

Allocative efficiency

Occurs at the output where average revenue equals marginal cost ($AR = MC$), ensuring resources are allocated optimally so no one can be made better off without making someone else worse off.

Productive efficiency

Occurs at the output where marginal cost equals average cost ($MC = AC$), representing the point where average costs are minimised.

Dynamic efficiency

A long-term efficiency resulting from innovation where a firm reinvests its supernormal profits to improve production methods or develop new product ideas.

X-inefficiency

Occurs when a firm lacks incentives to control production costs, resulting in higher average total costs ($AC$).

Perfectly competitive market

A market characterised by many buyers and sellers as price takers, no barriers to entry or exit, perfect knowledge, and homogeneous products.

Normal profit

The minimum level of profit required to keep a firm operating in the long run, occurring where total revenue equals total cost.

Perfectly competitive firm's supply curve

The firm's marginal cost curve ($MC$) above its average variable cost curve ($AVC$).

Shutdown rule

A rule stating that a business will exit the industry in perfect competition when facing losses.

Monopolistic competition

A market structure with many small firms, low barriers to entry and exit, slightly differentiated products, and some price-setting ability.

Excess capacity

A situation in monopolistic competition where firms produce less than the most efficient level of output in the long run.

Oligopoly

A market structure characterised by high barriers to entry and exit, a high concentration ratio, interdependence of firms, and product differentiation.

Concentration ratio

A measure calculated by totalling the market shares of the largest firms in an industry, typically the top 3, 4, or 5 firms.

Overt collusion

When firms explicitly agree, via spoken or written agreement, to limit competition or raise prices (price fixing).

Tacit collusion

When firms do not formally agree to cooperate but closely monitor and match each other's behaviour, such as price matching.

Game theory

A framework used by firms in oligopoly markets to make optimal decisions in circumstances with high levels of interdependence.

Dominant strategy

The strategy in game theory that yields the best outcome for a player regardless of what other players do.

Price war

When competitors repeatedly lower prices to undercut each other to gain or increase market share.

Predatory pricing

The practice of lowering prices, often setting the price ($AR$) below the average cost of production ($AC$), when a new competitor joins to drive them out.

Limit pricing

A strategy to prevent new competitors from entering by setting the price or average revenue ($AR$) at the average cost ($AC$) of production.

Prisoners' dilemma

A game theory model illustrating why two rational individuals might not cooperate even when it is in their best interests to do so.

Pure monopoly

A market structure with a single seller, no substitute products, and complete market power with a concentration ratio of $CR1=100\%$.

Legal monopoly (UK definition)

Defined by the UK Competition & Markets Authority (CMA) as any firm with a $25\%$ or more market share.

Price discrimination

Charging different prices for the same product to different consumers for reasons not associated with costs.

Third-degree price discrimination

Charging different prices for the same product to different consumers based on their willingness to pay and price elasticities of demand.

Natural monopoly

Occurs when the optimum number of firms in the industry is one due to significant high barriers to entry, such as infrastructure costs.

Cross-subsidisation

When supernormal profits from one product area are used to support another product area that may be less profitable.

Monopsony

A market structure where there is a single buyer in the market with wage-setting power and significant purchase control.

Perfectly contestable market

A market characterized by costless entry and no exit costs.

Hit and run competition

When short-run supernormal profits signal new firms to enter a market, extract profit, and then leave.

Sunk costs

Expenses that have already been incurred and cannot be recovered when a firm leaves an industry, such as advertising spending.

Barrier to entry

A condition that makes it difficult or expensive for a firm to enter a market to compete with existing suppliers.

Barrier to exit

A factor, such as sunk costs, that deters a firm from leaving a market even if it is making a loss.

Anti-competitive practices

Actions by competitors aiming to restrict competition, including cartel agreements, predatory pricing, limit pricing, and aggressive takeovers.