Economics: Market Structures and Market Failures

Flashcards covering market structures (perfect competition, monopolistic competition, oligopoly, monopoly), market failures (externalities, public goods), and government modification strategies.

Profit

The difference between the total cost of producing output and the total revenue obtained from selling that output.

Equilibrium Position of the Firm

The level of production where the difference between total cost and total revenue is the greatest; profit is maximized where $\text{marginal revenue} = \text{marginal cost}$.

Normal profit

The minimum return that a firm is prepared to accept to remain in business, considered a necessary cost to be met by the business.

Fixed costs

Costs a firm must meet regardless of production levels, such as capital equipment and rates.

Variable costs

Costs incurred by a firm only when production occurs, such as power and wages.

Marginal cost (MC)

The extra cost of producing one more unit of a good or service, calculated as $\frac{\text{change in total cost}}{\text{change in quantity}}$.

Marginal revenue (MR)

The extra revenue obtained by producing and selling another unit of output.

Average total cost (ATC)

The total cost (fixed plus variable) divided by the output, often represented as a U-shaped curve.

Law of Diminishing Returns

An economic principle where adding resources to a fixed amount of equipment eventually causes each new unit to cost more to produce than the last.

Perfect competition

A theoretical market structure characterized by many buyers and sellers, homogeneous products, perfect knowledge, and no barriers to entry.

Homogeneous product

Identical items offered for market exchange in an industry that serve as perfect substitutes for one another.

Monopolistic Competition

A market structure where many firms offer similar but not identical products, leading to product differentiation and non-price competition.

Product differentiation

A strategy used by firms to convince customers that their product is unique, allowing the firm to gain market power and brand loyalty.

Oligopoly

A market structure dominated by a few large firms (typically 3 to 8) that exhibit interdependence and high barriers to entry.

Concentration ratio

The percentage of an industry’s total output provided by the four largest firms; in oligopolies, this often exceeds $50\%$.

Price rigidity

A feature of oligopolies where firms have little incentive to compete on price because rivals will quickly match any price changes.

Collusion

An often illegal agreement among firms to set prices, market shares, or regions to avoid competition.

Duopoly

A market structure similar to an oligopoly but consisting of only two very large firms.

Monopoly

A market structure with only one seller of a product that has no close substitutes, giving the firm considerable market power.

Statutory Marketing Authorities (SMAs)

Regulated monopolies created by Australian legislation to control the supply and price of selected products, particularly in agriculture.

Partial Market Failure

Occurs when markets exist but fail to allocate resources efficiently or lead to undesirable social outcomes, such as negative externalities or inequality.

Negative Externalities

Harmful indirect effects on third parties who are not part of the market transaction, such as pollution or traffic congestion.

Factor Immobility

Geographic or occupational restrictions that prevent factors of production like labor or capital from moving to more productive uses.

Asymmetric information

An information failure where one party (usually the producer) has more information than the other, often leading to the over-production of demerit goods.

Merit Goods

Socially desirable goods that generate positive externalities but are underproduced by free markets, such as public hospitals and schools.

Complete Market Failure

Occurs when a market for a desired good fails to form at all, typically because the good is non-excludable and non-rival.

Public Goods

Goods that are non-excludable and non-rival, meaning private producers cannot charge for their use (e.g., national defence, oceans).

Free-rider problem

A situation where consumers benefit from a good without paying for it, leading to market failure in the provision of public goods.

ACCC

The Australian Competition and Consumer Commission, which works to ensure fair competition, pricing, and ethical practices.

Pigovian tax

A tax designed to correct negative externalities by internalizing the social cost into the private market price.

Exclusion Principle

The characteristic of private goods where people who do not pay for the good are excluded from its benefits.

Tragedy of the Commons

The overexploitation of shared resources (like air and water) because no single owner has an incentive to protect them.

Tradeable permits

Pollution rights allocated by the government that can be bought and sold, using market forces to cap total environmental damage.