Market Structures 3.4

What are the 4 efficiencies

• Allocative

• productive

• dynamic

• X- efficiency

Allocative efficiency

when resources are used to produce goods and services which consumers want and value the most are maximised. Value to society = marginal cost of production. P=MC

Productive efficiency

when products are produced at the lowest average cost so the fewest resources are used to produce each product. Minimum resourses, maximum output. MC=AC

Dynamic efficiency

When resources are allocated efficiently over time. AR>AC. Achieved in markets where competition encourages innovation but there are differences in products and copyright laws. SNP is required for incentive to invest

X-inefficiency

if a firm fails to minimise its average costs at a given level of output, it is x-inefficient and there is organisational slack. Occurs when their fail to minimise their cost for a specific output

Examples of monopolistic competiton

• Hairdressers

• estate agents

• resturants

Characteristics of monopolistic competition

• Large number of buyers and sellers

• Low barriers to entry or exit

• differentiated goods/products

• price making power is limited

• imperfect information

• non-price competiton e.g loyalty cards, renovation

Conditions for monopolistic competition

AC=AR, MR=MC. They are not allocatively or productively eficient as MR doesnt equal AR so AC cant equal MC and AC cant equal MR

What efficiencyis monopolistic competition likely to be

Dymanic efficient since they are differentiated products and so innovative products will give advantage over competitors, allowing SNP in the short run

When does pure monopoly exist

when one firm is the sole seller of a product in a market.

Application - Pure Monopoly

Closest example of a pure monopoly is google, who have 88% of the market share

What is third degree price discrimination

when monopolists charge different prices to different people for the same goods. E.g different times of the day, varied by region, discounts for elderly people

Price discrimination diagram

The diagram shows the separate markets for separate groups; those with elastic demand and those with inelastic demand

Second degree price discrimination

different prices for different quantities

Natural monopoly

The EOS are so large that even a single producer is not able to fully exploit them all. Natural monopolies tend to be found in industries with very high fixed costs such as railways.

Natural monopoly diagram

Pointless to encourage competition since it would raise average costs for the industry. If new firm enters the market, they will easily be priced out as their costs will be so much higher

cost and benefits of monopolies

• potential to make huge profits through profit maximisation

• SNP means firms will have finance for investments; able to build up reserves to overcome short term difficulties

• Able to compete against large overseas organisations

• maximise EOS, reducing corst and increasing profit further

• However, x-inefficiencies, sales/revneue maximising, profit satisfying or contestability wont allow for profit maximisation.

Employees and suppliers - Monopoly

• fewer workers due to lower output

• employees may recieve higher wages, particularly directors and senior managers

• reduce suppliers’ profits if monopolist buys all goods as monopsolist will reduce prices

Consumers - monopoly

• tend to be better off than if there was competition

• EOS= More efficiency so customers will enjoy higher consumer surplus

• increased range of goods and services due to cross subsidisation

• price discrimination allows for survival of a product or service, and benefits some customers while its negative for others.

• may pay higher prices and see porrer quality due to lack of competition

• less choice for consumers since only one firm is producing

What inefficiency is a monopoly likely to be

productively inefficient, since they dont produce at MC=AC. also Allocatively inefficient as P>MC

what efficiency is monopoly likely to be

dynamically efficient, as they are likely to make supernormal profits

Difference between SNP and Normal Profit

TR=TC is Normal profit. TR>TC is Supernormal Profit