MicroEconomics Market structures

What is allocative efficiency?

When price equals marginal cost, meaning resources are allocated to what consumers value most.

What is productive efficiency?

Producing at the lowest possible average cost.

What is dynamic efficiency?

Efficiency gained through innovation, investment, and improved products over time.

What is normal profit?

The minimum profit needed to keep a firm in its current market.

What is supernormal profit?

Profit above normal profit.

What is loss minimisation?

Producing where marginal revenue equals marginal cost when losses are smaller than shutting down.

What is total revenue?

Price multiplied by quantity sold.

What is average revenue?

Total revenue divided by quantity sold. Usually the price.

What is marginal revenue?

The extra revenue from selling one more unit.

Why is marginal revenue below average revenue in monopoly?

The firm must lower price to sell more output.

What is a barrier to entry?

Anything that makes it difficult for new firms to enter a market.

Give examples of barriers to entry.

Economies of scale, patents, branding, high start up costs, control of raw materials.

What are economies of scale?

Falling average costs as a firm grows in size.

What are diseconomies of scale?

Rising average costs when a firm becomes too large and inefficient.

What is X inefficiency?

When a firm has higher costs than necessary due to weak competitive pressure.

What is interdependence?

When firms consider rivals' likely reactions before changing price or output.

What is collusion?

When firms cooperate to set prices or output instead of competing.

What is overt collusion?

Open and formal agreements between firms.

What is tacit collusion?

Informal collusion without direct agreement.

What is price leadership?

When one firm changes price and others follow.

What is non price competition?

Competing through quality, branding, advertising, or service instead of price.

What is a contestable market?

A market with low barriers to entry and exit.

Why may a monopoly behave competitively in a contestable market?

The threat of new entrants limits pricing power.

What is a natural monopoly?

A market where one large firm can supply the whole market at lower cost than many firms.

Why can monopolies gain economies of scale?

Large output spreads fixed costs over more units.

Why may monopoly charge higher prices?

Lack of close competition gives market power.

Why may monopoly reduce output?

To raise price and maximise profit.

Why may monopoly innovate?

High profits can fund research and development.

What is productive efficiency in perfect competition long run?

Firms produce at the lowest point of average cost.

What is allocative efficiency in perfect competition?

Price equals marginal cost.

Why are firms price takers in perfect competition?

Each firm is too small to influence market price.

Why does perfect competition only earn normal profit in the long run?

Supernormal profit attracts new firms, increasing supply and lowering price.

Why may perfect competition be unrealistic?

Products are rarely identical and information is imperfect.

What is monopolistic competition?

Many firms selling differentiated products with low barriers to entry.

Why do firms in monopolistic competition earn normal profit in the long run?

New firms enter if profits exist, reducing demand for existing firms.

What is oligopoly?

A market dominated by a few large firms.

Why are prices often rigid in oligopoly?

Firms fear rival reactions if they change price.

What is the kinked demand curve theory?

A model suggesting prices stay stable because rivals match price cuts but ignore price rises.

What is monopoly?

A market with one dominant seller and high barriers to entry.

What is market power?

The ability to raise price without losing many customers.

How is monopoly power often measured?

Market share or concentration ratios.

What is a concentration ratio?

The market share of the largest firms in an industry.

What is price discrimination?

Charging different prices to different consumers for the same product.

What conditions are needed for price discrimination?

Market power, ability to separate consumers, limited resale.

What is first degree price discrimination?

Charging each consumer their maximum willingness to pay.

What is second degree price discrimination?

Different prices based on quantity bought or version purchased.

What is third degree price discrimination?

Different prices to separate customer groups.

What is consumer surplus?

The difference between what consumers are willing to pay and what they actually pay.

What is producer surplus?

The difference between market price and minimum supply price.

Why can monopoly reduce consumer surplus?

Higher prices transfer welfare from consumers to producers.

What is deadweight welfare loss?

Lost welfare caused by underproduction or misallocation of resources.

What is regulation of monopoly?

Government action to limit abuse of market power.

Give examples of monopoly regulation.

Price caps, profit caps, competition policy, breaking up firms.

What is a price cap?

A maximum price a regulator allows a monopoly to charge.

Why may regulation fail?

Poor information, regulatory capture, or reduced incentives to invest.

What is profit maximisation?

Producing where marginal revenue equals marginal cost.

What is sales maximisation?

Aiming for highest revenue or output rather than highest profit.

What is revenue maximisation?

Producing where marginal revenue equals zero.

What is shut down point?

When price falls below average variable cost in the short run.

What happens if price is above average total cost?

The firm makes supernormal profit.

What happens if price equals average total cost?

The firm makes normal profit.

What happens if price is below average total cost but above average variable cost?

The firm makes a short run loss but continues producing.

What happens if price is below average variable cost?

The firm shuts down in the short run.