Markets - why they fail Essay

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Markets - why they fail

* Allocative efficiency occurs when resources are distributed in such a way that no consumers could be made better off without other consumers becoming worse off.

* Dynamic efficiency occurs when resources are allocated efficiently over time.

* Productive efficiency is achieved when production is achieved at lowest cost.

* Technical efficiency is achieved when a given quantity of output is produced with a minimum number of inputs.

Consumer and Producer Surplus

Text Box: A perfectly competitive market consists of: Many firms in the industry- therefore firms cannot manipulate the prices. Low barriers to entry and exit- if profits are achievable new
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2. Resource Barriers - a monopolist may be able to buy or acquire the key resources needed to produce a good. E.g. supermarket may buy the only plot of land available for development of a large supermarket in a small town.

3. Unfair competition - once created a monopolist may use unfair competitive practices, such as cutting prices temporarily until the competitor is forced out of business

4. Natural cost advantages - some firms are natural monopolies because not a single firm in the industry can reduce their average cost to their minimum. This is usually because that firm is experiencing economies of scale:

Purchasing Economies - bulk buying often results in a cheaper cost per unit input

Marketing Economies - The cost of advertising can be spread over more units of output

Technical Economies - A large supermarket costs less to build than a small one

Managerial Economies - large firms employ workers who specialize in specific tasks, who are therefore more qualified and efficient.

Financial Economies - large firms are more credit worthy than small firms. 5. Product Differentiation - by making their product seem very different from the competition through marketing and branding a monopoly can be established.

6. Control over outlets - so competitors cannot get their products to the market

Government may allow a monopoly to exist because:

Alone they are

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