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ECONOMICS THEME 3 - TOPIC 3.4 - MARKET STUCTURES - Coggle Diagram
ECONOMICS THEME 3 - TOPIC 3.4 - MARKET STUCTURES
3.4.1 Efficiency
Efficiency can be used to judge how well the market allocates resources, and the relationship between scarce inputs and outputs
Allocative Efficiency
This is achieved when resources are used to produce goods and services which consumers want and value the most, social welfare is maximised. Where
P=MC
Productive Efficency
When a firms products are produced at the lowest average cost, so minimum resources used to produce maximum output. Can only exist if firms produce at bottom of AC curve and in short run is where
MC=AC
Dynamic Efficiency
When resources are allocated efficiently over time, leading to falling of long run average costs. Market is dynamically efficient of consumers needs and wants are met as time goes on. Related to being innovative to reduce costs.
X-inefficiency
A firm is inefficient when it's producing within the AC boundary. Costs are higher than they would be with competition in the market
3.4.5 Monopoly
Characteristics of monopoly
Pure monopoly
exists where one form is the sole seller of a product in a market
However, in the real world, pure monopoly rarely exists but a firm can legally be considered as having monopoly power if it has more than 25% of the market. The model assumes there is only one firm in the industry, they profit maximise and there's high barriers to entry
Third degree price discrimination
This is when monopolists charge different prices to different people for the same good or service e.g trains
In order for price discrimination to occur, the firm must be able to split the market and the customers must have different elasticities of demand
Costs and benefits
Firms benefit as they're able to increase profits by improving dynamic efficiency
Those in the elastic market gain as they're able to pay a lower price than they otherwise would, but some have to pay a higher price
Natural monopoly
In these industries the economies of scale are so large that not even a single producer is able to fully exploit them all
competition is bad as they can easily out-price the monopoly
Usually occurs in industries with high fixed costs e.g trains or water
Costs and benefits
Firms
Potential for huge profits
More finance for further investment
Compete overseas
Maximise EoS
But lack of competition can lead to firms being complacent so may not maximise profits
Employees
Monopolists produce at lower outputs so less employees
But sales maximising may increase output and therefore more employees
Suppliers
Depends on whether the monopolist is a monopsonist which buys most of the suppliers goods
Consumers
consumers tend to be better off with natural monopolies as the large EoS results in more and cheaper goods
Efficiency
They're dynamically efficient
3.4.4 Oligopoly
Characteristics
High barriers to entry + exit
High concentration ratio
- only a few firms supply the majority of the market e.g UK supermarket industry
Interdependence of firms
- actions of one firm affect another firms behavioiur
Product differentiation
Reasons for collusive and non-collusive behaviour
Collusive behaviour occurs if firms agree to work together on something e.g set a price
Collusion leads to lower consumer surplus as the firms can charge higher prices
Non collusive behaviour occurs when the firms are competing
Overt and tactic collusion
Overt collusion
is when a formal agreement is made between firms but is illegal in most places
A cartel
is a group of two or more firms who have agreed to control prices, limit output or prevent new firms entering the market. They lead to higher prices for consumers and restricted output
Game theory and the prisoners dilemma
Game theory is related to the concept of interdependence between firms in an oligopoly. It's used to predict the outcome of a decision made by one firm, when it has incomplete information about the other firm
It can be explained using the Prisoners Dilemma
Types of price compeition
Price wars
A price war is a type of competition, which involves firms constantly cutting their prices below that of its competitors and then the other firm does the same.
Predatory pricing
Limit Pricing
- stops new firms entering market as the price of competition is too low
Non-price competition
Customer service, quality, etc
3.4.2 Perfect Competition
This is where the market has a high degree of competition but 'perfect' doesn't mean it maximises welfare or produces ideal results. No market is completely perfectly competitive but the closest example is agriculture
Charactersitics
There must be
Many buyers and sellers
There must be
Freedom of entry and exit from the industry
There must be
perfect knowledge
The products must be
homogenous
potentially
imperfect information
Profit maximising equilibrium
Firms are assumed to short run profit maximise but only make normal firms in long run and will likely leave the industry
Efficiency
It's
Productively efficient
since they produce at MC=AC and also
allocative efficient
since they produce where P=MC
3.4.3 Monopolistic competition
This is a form of imperfect competition with a downward sloping demand curve. e.g hairdressers, estate agents and restaurants
Characteristics
There must be a
Large number of buyers and sellers
There are
no barriers to entry or exit
However, monopolistic competition firms produce
differentiated, non-homogenous goods
. Meaning the individual firms do have some price setting power
Profit maximising equilibrium
In the SR, firms can make supernormal profits but due to low barriers to entry/exit, it's only normal profits in the long run
However, the limitation is with imperfect information firms may be unaware of firms in the industry making profits, so might not join. As well as the differentiated products meaning some firms will retain SNP with a USP
Efficiency
Since they profit maximise, they can't be allocatively efficient or productively efficient as MR doesn't equal AR so AC can't equal MC and AC can't equal MR