Economics Theme 3: Market Structure, Contestability And Efficiency

Front 1

Give 5 reasons why the government wants markets to be competitive

Back 1

Lowe Prices

High levels of choice

High Quality

High Output

Increased Efficiency

Front 2

Define concentration ratio and specify the two types

Back 2

Concentration ratio measure the market share of the largest firms in the industry

High Concentration Ratio: where few firms dominate the market

Low Concentration Ratio: where many firms are in the market

Front 3

What is the rule of thumb for determining how concentrated a market is?

Back 3

The “F” Rule. If Five or Fewer Firms have 50% or more market share then the market is highly concentrated.

Front 4

What are the four types of market structure

Back 4

Perfect Competition (Least Concentrated)

Monopolistic Competition

Oligopoly

Monopoly (most concentrated)

Front 5

Give four things that determine market concentration

Back 5

-Ease of entry

-Extent to which goods and services are identical

-The extent to which knowledge is perfect (about production, technique, prices etc.)

-Whether the action of a firm will impact other firms.

Front 6

How can the extent to which goods and services are identical determine market concentration?

Back 6

If products are homogenous then it means they are perfect substitutes

If products are branded or unique this leads to less competition and increasing prices.

Front 7

How can the extent to which knowledge is perfect determine market concentration?

Back 7

Consumers are able to easily compare products.

Perfect knowledge also means that all technology and production techniques will be freely available for any firm to use (I.e. no patents)

Front 8

How can the actions of a firm impact other firms?

Back 8

In some markets (e.g. oligopoly) firms may directly interact with each other.

This can raise the risk of firms colluding to raise prices.

Front 9

What are two types of barriers to entry?

Back 9

Natural and Artificial

Front 10

State 5 natural barriers to entry

Back 10

Technical barriers

High sunk costs markets barriers

Economies of Scale

Geographical barriers

Front 11

Explain what technical barriers to entry are

Back 11

Lots of industries (e.g. car manufacturers) require expensive or complicated advanced machinery to be bought before a firm starts operating

Front 12

Explain what high sunk costs barriers to entry are

Back 12

These are costs that cannot be reclaimed if your business needs to exit the market

If these are too high then businesses may be reluctant to enter the market as it increases the costs of failure

Front 13

Explain what marketing barriers to entry are

Back 13

To compete with existing firms you may need to run nationwide marketing campaigns to get noticed by consumers

Front 14

Explain how economies of scale can act as a barrier to entry

Back 14

Larger firms benefit from economies of scale meaning they can produce goods at lower costs than newer firms

Front 15

Explain what geographical barriers to entry are

Back 15

Some firms (e.g. oil firms)have a natural advantage depending on where they are based (e.g Middle East)

Front 16

Give two artificial barriers to entry

Back 16

Regulation

Restrictive Practices

Front 17

Explain how regulation can act an an artificial barrier to entry

Back 17

Some markets are illegal (e.g. cannabis). Some markets need a license (e.g pubs) and other may be restricted by patent or copyright (e.g. music)

Front 18

Explain how restrictive practices can act as an artificial barrier to entry

Back 18

These are used by existing firms in the market to maintain high market share

It can include hostile takeovers, failing to supply competitors, predatory pricing or land banking.

Front 19

What could be a barrier to exit?

Back 19

A barrier to exit is something that stops a firm from leaving the market.

E.g a long term contract which you have to pay a penalty to terminate, damage to a firms brand or redundancy payments for staff.

This means that firms are less likely to enter a market if they can’t leave it easily.

Front 20

Why have many firms developed monopoly power? Even though they’re theoretically “anti-competitive” do they always have a negative impact on consumers?

Back 20

Many firms have monopoly power because they produce superior products to their rivals. They maintain this position by continuing to offer quality goods and services and low prices.

Front 21

What are competition authorities mainly interested in?

Back 21

Whether there is potential for competition in a market. Even if there is only one firm in the market, it should act like there is a threat of competition.

Front 22

What does an uncontestable market look like?

Back 22

-High Start Up and Sunk Costs

-The existence of well-known brand names.

-R&D/Technical Requirements

-Intellectual Property Rights

-Economies of scale

Regulations limiting capacity

-Use of predatory or limit pricing

-Barriers to exit.

Front 23

How can contestability be increased?

Back 23

-New technology such as 3D printing or e-commerce which reduce production costs

-Deregulation

Tougher crackdowns

Front 24

What are the 4 measures of efficiency?

Back 24

Productive Efficiency

Allocative Efficiency

Dynamic Efficiency

X-inefficiency

Front 25

Define Productive Efficiency

Back 25

This exists when production is achieved at minimum cost. I.e. at the Minimum Efficient Scale (lowest point on AC curve). This matters because resources are used more efficiently and if firms can benefit from lower costs they may reduce prices for consumers

Front 26

Define Allocative Efficiency

Back 26

Allocative efficiency occurs when resources are distributed to the goods and services that consumers want. This is shown where supply meets demand, or when AR=MC. This maximises utility. It exists at P = MC, which means that consumers pay for the value of the marginal utility they derive from consuming the good or service. Free markets are considered to be allocatively efficient.

Front 27

Define Pareto Efficient

Back 27

This is a type of allocation of resources where if P=MC in all industries then the economy then we will be producing on the PPF. This is where it is impossible to make anyone better off without making someone worse off.

Front 28

Define Dynamic Efficiency

Back 28

This refers to improving efficiency over a period of time. This could involve creating new goods and services that society needs (e.g. a cure for cancer) or creating processes that will improve efficiency in the future. They require research and development

Front 29

What two main assumptions do Dynamic Efficiency Require?

Back 29

-Supernormal profits so that firms can re-invest profits.

-The second is the intellectual property law such as patents to stop firms inventions and innovations being copied by competitors.

Front 30

Define X-inefficiency

Back 30

This describes bureaucracy and complacency (organisation slack). Large organisations that do not face much competition face less pressure to be efficient and public sector organisations do not have the profit motive to encourage cost-cutting.