1
Q
Why may a firm want to grow?
A
- A firm may wish to take advantage of economies of scale to decrease their long run average cost, bringing total costs down, thus increasing profit
- Firms may wish to control a greater share of the market, possibly giving them more monopolistic powers. This gives them greater influence over prices aswell as being able to implement artificial barriers to entry
- To increase profit
2
Q
Why do some firms remain small?
A
- The size of the market can be a limiting factor, if a firm is operating within a niche market, the limited pool of potential consumers can be a limiting factor
- The firm may be localised, so opportunity for expansion is limited
- The owner of the buisness may be profit satisficing, so feel no need to expand. A sole proprietor may wish to stay in control of their buisness.
- Smaller firms may be unable to raise the necessary finance for expansion, either through limited retained profit or through limited access to credit
- To avoid diseconomies of scale
3
Q
What is the principle agent problem? How can it be prevented?
A
A problem which arrives from a conflift between the objectives of agents (managers) and the principals (owners)
Owners/shareholders wish to acheive maximum profit, while managers may have other objectives in mind, such as market expansion or a greater work/life balance - managerial slack can occur. This arrises due to an information asymentry, where the agents are more aware of the effects of their actions than the principals, so agents are not held fully accountable.
It can be minimised by increasing manager monitoring, or by providing perfomance based rewards.
4
Q
what is the distinction between public and private sector
organisations
A
private sector firms are privately owned by individuals or groups of individuals.
The public sector is made up of state owned organisations.
5
Q
what is the distinction between profit and not-for-profit
organisations
A
profit organisations are often assumed to be profit maximising, where they wish to create the greatest surplus of revenue over cost
Not for profit organisations may have other goals, and wish to cover their costs but not to make profit. They may be charities with social/enviromental goals in mind.
6
Q
What is organic growth?
A
A firm growing using its own resources (internally).
This is usually done by reinvesting retained profit back into the buisness to increase output
7
Q
What is verticle intergration?
What are the two forms?
A
Verticle intergration is a merger between two firms in the same industry but at different stages of production.
It can be forward verticle intergration - where a supplier buys one of its buyers (buying a firm in a further stage of production, closer to the consumer)
It can also be backwards verticle intergration - where a buyer buys one of its suppliers (merging with a firm at a stage of production further away from the consumer)
8
Q
What is horizontal intergration
A
A mmerger between two firms in the same industry at the same stage of production
9
Q
What is conglomerate intergration
A
A merging of two firms in completely unrelated industries
10
Q
What are the advantages of organic growth?
A
- Organic growth is low risk, as there is less chance of buisnesses defualting on loans or failing intergration
- it is less time consuming
- sole propiertors get to keep control over their buisness
11
Q
what are the disadvantages of organic growth?
A
- it takes a long time to accumalate enough retained profits to grow organically, so buisness may miss out on opportunities to make more profit in a new market
- There may be limitiations on the possible extent of organic growth, so growth and profit therefore will be limited
12
Q
What are the benefits of vertical intergration?
A
- vertical intergration may allow the firm to capture the profits from a different part of the supply chain
- It reduces supply chain uncertainty as they are in control of the pecursors and nexrt steps in production, so can gurantee the supply of factors of production
- Can control delivery directly so can reduce time ineffencies between the two stages in the supply chain
- vertical intergration an reduce the opportunities of growth of competitor firms, so increase market share and power. forward intergration can limit potential buyers of competitors products, backwards intergration can reduce the supply of competitors
13
Q
what are the disadvantages of vetical intergration?
A
- A firm involved in vertical intergration may have limited knowledge in that particular stage of production - eg a motor manufacturing firm may have little knowledge about selling cars.
- Firms often over pay for a takeover compared to what the firm is actually worth
- firms may fall into managerial diseconomies of scale, as the extra layers of management needed to control the firm increase long run average cost
14
Q
What are the advantages of a horizontal merger?
A
- It may allow for a reduction in average cost due to economies of scale
- It can reduce competition in the market, giving the firm more monopolistic powers
- It can allow one firm to buy the unique assets of a different firm, such as a new drug
- As the firms are in the same industry + stage of [rpduction, they will share knowledge and expertise so the merger is more likely to be successful.
15
Q
What are the disadvantages of horizontal intergration?
A
Firms often over pay for a takeover compared to what the firm is actually worth
* firms may fall into managerial diseconomies of scale, as the extra layers of management needed to control the firm increase long run average cost
16
Q
What are the advantages of conglomerate intergration
A
- By buying a firm in a different market, the firm reduces risk. The firm is now less succeptable to the booms and busts of that market
- A conglomerate can find it easier to expand as it is not limited by the size of just one market
- a conglommerate can use the profits from one industry to reinvest in another
- asset stripping
17
Q
What are the disadvantages of conglomerate intergration?
A
- A lack of knowledge in the new industry can reduce perfomance
- if asset stripping occures, it benefits no one except the profit makers
- over paying for the original take over
- loss of jobs/consumer choice
18
Q
What is a demerger?
A
A demerger occrues when a firm splits itself into two or more seperate parts, to create a new firm
19
Q
What are the possible reasons for a demerger?
A
- Lack of synergies - when one part of the firm is having no real impact on the other, it makes no sense for managers to have to split their time between the two firms as this is inefficient and can lead to diseconomies of scale
- valuation of the seperate companies - the market value of the two demerged firms may be higher then when they are a single firm, this motivates shareholders to want a demerger as they will experience an apreciation in the value of their assets - this is called ‘creating value’
- focussed companies - by concentrating on a particular market, managers and firms can become more specialised, possibly leading to greater retained profit
20
Q
What are the impacts of a demerger on businesses, workers and consumers
A
buisnesses - firms will benefit from a demeger if greater specilisation leads to greater effiinecies
workers - some managers may gain promotions as new senior leadship roles are created following a demeger. However, some roles may be lost so workers may lose their jobs
consumers - consumers will benefit if a demerger causes firms to cut costs and lower prices. This may not be the case if firms are profit maximising in a monopolistic market and keep prices stable
21
Q
what is the definition, and the formula for the following:
* Total revenue
* averahe revenue
* marginal revenue
A
- total revenue (TR) is the total amount of money recieved from the sale of a good or service at any level of output. TR = Price X quantity
- average revenue (AR) is the average revenue recieved for selling one good or servicee. AR = TR / quantity
- Marginal revenue is the additional revenue recieved from selling one more good or service. This can be positive or negative, as if increasing price causes demand to fall at a faster rate (because PED is elastic), then selling an extra unit will cause TR to fall.
MR = change in TR / change in quantity
22
Q
What are, and the formula for:
* Fixed Costs
* Variable Costs
* Total Costs
* Marginal Costs
* Average Fixed Costs
* Average variable costs
* Average Total costs
A
- FC - costs that do not vary with level of output
- VC - costs that do not vary with level of output
- TC - FC + VC
- MC - the change in total cost that arrises from producing one extra unit MC = Change in TC / change in Q
- AFC = FC / Q
- AVC = VC / Q
- ATC = TC / Q
23
Q
What is diminishing marginal productivity?
A
As the input of a variable factor is increased, there is diminishing marginal productivity, as the additional output produced by each additional unit of output falls
24
Q
At which point will demand be inelastic on a revenue curve in relation to MR?
A
As long as MR is positive, demand is price elastic, as the decrease in price leads to a proportionately larer increase in quantity sold. When MR is negative, demand is relatively price inelastic as a decrease in price leads to a relatively smaller increase in quantity sold When MR = 0, demand is unitary elastic
25
What are economies of scale?
A reduction in long run average cost as output increases - firms face increasing return to scale, as cost is spread over a wider range of output
26
What are diseconomies of scale?
An increase in Long run average cost as output increases
27
What are the two types of economies of scale
internal and external
28
What arethe 6 forms of internal economies of scale and what is the anacronym to remember them?
* **R**isk bearing - as a buisness grows, it can spread its opportunity cost over a much greater range of output
* **F**inancial - as a firm gets larger, they can aquire finance at a lower interest rate, as they are reputable so the loan is much less risky for the bank
* **M**anagerial - As firms grow, the managment team does not need to grow as the much as the size of thr firm gorws, as specalist managers can be hired
* **T**echnology - Both in storage (volume rises faster than surface area) and in production, where capital equipment which is a high fixed cost but very efficient can be brought in
* **M**arketing - can buy advertising in bulk
* **P**urchasing - as a firm grows, they cn purchase raw materials in bulk**
Really fluffy monsters try mince pies**
29
What are + Examples of external economies of scale?
cost advantages that occur when multiple companies in an industry benefit from external factors
* Increased transport in the area due to the growth in your industry
* increasing pool of skilled labour
30
What is minimum efficient scale?
The level of output where long run average costs stop falling as output increases.
31
What is normal profit?
Profit that covers opportunity cost as well as explicit costs
32
Whats the difference between abnormal and supernormal profit
abnormal is made by firms in perfect competition as it is not sustainable
Supernormal can be sustained in the long run
33
where is profit maximisation on a graph?
MC=MR
34
Suppose a firm is producing output at less than MC=MR level, why is it profitable to increase production?
The marginal revenue from seling an additional unit of output is higher than the marginal cost of producing it, therefore the firm can increase profits by selling that unit of output.
35
Explain what a shutdown price is?
In the short run, a firm may choose to remain in a market even if its not covering their opportunity costs, as long as their revenue is covering their variable costs. As the firm as already inccured its fixed costs, . If the revenue the firm is receiving is greater than its variable cost (R > VC) then the firm is covering all variable cost plus there is additional revenue which partially or entirely offsets fixed costs. A firm should immediately leave an industry when revenue does not even cover variable costs, as it is generating larger losses by producing than if it simply shut down
36
What is allocative efficency?
Where resources are being allocated perfectly to match consumer and producer surplus - where marginal benefit to consumers = the marginal cost of production. At this level of output, societal welare is maximised.
It occures when price = MC, or AR=MC
37
What is productive efficency?
Productive efficency occures when firms maximise output at the lowest possible average cost, aka they are fully utilising economies of scale.
MC=AC
38
What is dynamic efficiency?
Where firms reinvest supernormal profits into research and development, or new technology. This occures when firms are making supernormal profit (no gurantee this will translate to real life as they may use this money to pay the dividends of shareholders)
39
What is x ineffinciency?
The difference between the actual and minimum cost of production for a given output produces X-inefficiency.
Companies will incur X-Inefficiency as a result of lack of motivation to control its costs, which brings the average cost of production exceeds costs actually required for production. For example, the company have a potential potential cost curve. However, due to the lack incentive to motivate on control costs, the company's actual cost curve is at a higher position compared to the potential cost curve.
40
What is a sunk cost?
A sunk cost are costs that have already been incurred and cannot be recovered, therefore should make no influence over peoples actions
41
What is bygones principle?
According to classical economics and standard microeconomic theory, only prospective (future) costs are relevant to a rational decision. At any moment in time, the best thing to do depends only on current alternatives.
hus, if a new factory was originally projected to cost $100 million, and yield $120 million in value, and after $30 million is spent on it the value projection falls to $65 million, the company should abandon the project rather than spending an additional $70 million to complete it. Conversely, if the value projection falls to $75 million, the company, as a rational actor, should continue the project
42
What are the assumptions of a perfectly competitive market?
* Firms are selling homognous products, which are perfectly substitutable
* All firms have access to factors of production
* Many buyers and sellers, none of which are small
* No barriers to entry or exit into the market
* Price takers, soo have a perfectly elastic demand curve
* perfect knowledge of market conditions
* firms are profit maximisers.
43
Why do firms in perfect competition face a horizontal MR=AR=D curve?
In perfect competitoin, firms ahve no price setting power, so the price remains the same no matter how many units are sold. Therefore, changing the quantity sold does not change price, meaing MR and AR are constant (Price does not change, so each additional unit of output adds the same amount to total revenue)
44
If fixed costs increase, what will happen to MC and AC curves?
AC will shift out, but not MC, as MC is the increase in cost incurred from prodjucing an extra unit output, and fixed costs do not vary with output, thus MC stays the same.
45
If variable costs increase, what will happen to MC and AC?
Both MC and AC will shift out.
46
Why are firms in perfect competition price takers?
For one, each firm holds a relatively small share of the market. This means they lack market control to be ablle to influence prices.
Secondly, a firm cannot raise prices, as goods are homognous and are perfectly substitutable, so consumers (with perfect knowledge) will buy goods from a different firm). Firms cannot lower prices, as they are assumed to be operating at normal profit, meaning to lower prices would mean incurring a loss).
47
A firm operating in a perfectly competitive market is making a loss, explain why in the long run it will make normal profit.
If firms are making a loss, whereby AC is higher than AR even at the profit maximising level of output at Q profit max, this acts as a signal for firms to leave the industry, as they are perfectly aware of market conditions and can do so as there are no barriers to exit. Thus, market supply will shift in, reducing quantity supplied, which increases price in the market as scarcity has increased, this increases average revenue, causing AR to shift outwards. This will continue to happen until AR=AC, in which all firms are making normal profit, meaning the market is in long run equilibrium.
48
Efficiency in perfect competition
Allocative - always
Productive - not in the short run but in the long run
X - always
Dynamic - no
49
Advantages of perfectly competitive markets?
Allocative and productive efficency - consumers pay what it costs to produce, meaning consumer surplus is maximised and resources are being allocated to match consumer demand.
Jobs should be created
50
What are disadvantages of perfect competition
Lack of dyanmic efficiency - firms fail to earn supernormal profits in the long run, meaning they have no ability to reinvest it into R&D, meaning quality and innnovation in the market will be minimal.
Lack of economies of scale - whilst productively efficient, an assumption of perfect competition is that there are no relatively large firms. This limits the baility of firms to expand their production in the long run to fully utilise economies of scale, as they may be unable to shift SRAC to a lower point on LRAC. Thus, prices may be higher than desireable
51
What are the characteristics of a monopoly?
Significant barriers to entry and exit
A single, dominant firm (a pure monopoly has 100%)
firms are price makers
monopolies have access to economies of scale
imperfect knowledge
products are differentiated
Limited access to factors of production
52
What are some examples of near pure monopolies?
utilities
google (90%)
53
Why do monopolies face a downwards sloping MR and AR curve?
As the only supplier of a good or a service, a monoplies demand curve is the industries demand curve, therefore to sell more products they must lower price, as governed by the law of demand
54
What is the definition of price discrimination?
Whenn a firm charges different prices to different consumers for a different product.
55
What are the 3 conditions necessary for a firm to be able to price discriminate?
* The firm must have price setting power
* the firm must be able to seperate the market by identifying the consumers with different elactisities of demand
* Prevent market seepage
56
How does third degree price discrimination work?
This occures when firms can seperate their customers into two groups, one with more price inelastic demand and the other with more price elastic demand (eg for rail companies, people who use it for commuting to work vs leisure). The marginal cost to the firm is the same for each sub market, however, the MR and AR curves (due to the differing elacisities) are different, so by charging different profit maximising prices for each sub market, the monopoly generates the greatest level of super normall profit.
57
What are the cons of price discrimination?
* Allocative inefficiency - by charging a price way above MC, the firm drastically reduces consumer surplus
* inequalities
* anti competitive nature - if third degree price discrimination leads to lower prices being charged for consumers with price elastic demand, then this reduces the ability of other firms to enter the market
58
What are the benefits of price discrimination?
* higher supernomal profits could be used to be dynamically efficient
* higher output allows firms to benfit from economies of scale
* some consumers can purchase goods at lower prices, which they may not have been able to at the original price
59
What are the characterisitcs of perfect competition
* A large number of buyers and sellers
* low barriers to entry or exit
* some product differentiation
* some price setting power
* good knowledge of market conditions
60
What are some examples of perfect competition?
Night clubs
Food outlets
Barbers
61
What are the advantages of a monopoly?
* Higher sales allow the monopoly to fully utilise economies of scale, which will reduce long run average costs, which may translate to a reduction in costs for the consumer, however there is no gurantee these lower costs will translate to the consumer
* Monopolies can be dynamically efficient by reinvesting supernormal profits into R&D, which can increase the quality and variety of goods available to society
* Patents and the success of monopolies encourage enterprise and innovation
* For natural monopolies, such as utilities (water), it would not make sense for there to be several firms supplying the same good, as the extremely high fixed costs in the form of infrastructure creates a natural monopoly.
62
What are the disadvantages of monopolies?
* Monopolies are not allocatively efficient, as price is set significantly higher than MC=P. This means consumers suffer from higher prices as well as reduced quantity, meaning societal surplus is not maximised - consumer surplus is partly absorbed by the monopoly in the form of super normal profit
* With a lack of competition in the market, the monoply has less incentive to innovate and cut costs, leading to x inefficiency
* The monoply is likely to be a monopsony in that industry, meaning they have the power to surpress wages below equilibrium
* Consumers have less choice.
63
What are the disadvantages of monopolistic competition?
* Firms are neither allocatively nor productively efficient in the long run. This means costs are higher, quantitiy is lower and societal surplus is reduced when compared to perfect competition
* normal profits in the long run create limited opportunity for firms to reinvest into R&D and thus become dynamically efficient.
* Firms cannoot fully exploit economies of scale
* The competition that occures on non price factors can lead to excessive spending on advertising, which could be seen as wasteful and cause AC to rise excessively high. However, the need to compete in this way may provide an incentive to firms to reduce x - inefficencies.
64
What is the potential benefit of monopolistic competitve firms?
Although the firm is not perfectly efficient in any regard, the increased competition could be seen as a happy alternative to complete monopolistic power.
In addition, consumers may be willing to pay slighlty higher prices in return for the variety that slightly differentiated products bring. Consumers want to have sovreignty.
65
What are the assumptions of oligopoplies?
* A few dominant firms
* high concentration ratios
* high barriers to entry / exit
* product differention, so firms compete using non price factors
* Profit maximisation is not the sole objective of firms.
* firms are interdependent, so prices are rigid
* firms are price makers
66
How do you calculate the n-firm concentration ratio?
You add up the market shares of the largest firms in the oligpoly, you write it like this
"The n-firm concentration ratio is ...% (Firm 1 ...% + firm 2 ...% + firm 3 ...% + firm 4...%)
66
Why are prices in an oligopoply rigid?
The firm percieves that it faces a kinked demand curve around the current price P* Q*. It knows the degree of sensititivity to price chanages depends on the actions of the other firms in the market, and thus there is an inelastic (if firms copy the firms move) and elastic (if firms ignore the move) demand curve. If the firm increases price, this increase will fall on the elastic demand curve, as other firms will continue to sell the products at the original price, and consumers will switch consumption away from the firm which has increased prices, so they will lose market share as the increase in price is significantly smaller than the reduction in quantity - they have no incentive to increase price. On the other hand, if a price reduction will force other firms in the market to also lower prices, as they do not want to be undercut and lose their price competitiveness, so the decrease in price will occure on the inelastic demand curve, meaning all firms are worse off as the decrease in price will be significantly larger than the increase in quantity. This shows the interdependence of firms, and, that in the long run, prices will remain fairly stable (unless their is collusion)
67
What relevance is the vertical discontinuity in the MR curves for a kinked demand curve?
In a kinked demand curve model (as always) D=AR, which also means there are two MR curves. They do not meet, so there is a vertical gap between them, which is connected by another MR curve
68
What numbers should go on the game theory diagram?
3m, 3m
0.5m, 4m
0.5m, 4m
1m, 1m
69
Explain the chain of reasoning examing the impacts of game theory
Firm A and B both charge £1, making 3m each with a communical outcome of 6m. Firm A, with firm B charging £1, ccan either charge the same and earn 3m, or undercut B and charge 90p, earning 4m. Therefore, it is logical for firm A to charge 90p. This increases A's revenue by 33%, however the value of the search market has fallen by 25%. Firm B has now two choices, whether to carry on charging £1 or to match A's 90p. It is logical for firm B to lower its prices, as it doubles their revenue. Therefore, we have made it to nash equilibrium. This has created a price war, and has resulted in a significant reduction of both of the firms revenue, as well as the communal market share.
70
What is nash equilibrium?
The outcome in a game theory matrix which is acheived when both players choose the option in which their outcome is maximised regardless of what the other firm is doing. This only occures in a non co-operative game.
71
What three conclusions can be drawn from a game theory matrix?
* There is likely to be price rigidity in a market.
* Both plays have an incentive to collude to fix prices high and maximise communal outcome
* however, there is a constant temptation to cheat on the agreement
72
What is a non cooperative game in game theory?
A game where there are no external rules or agreements which enforce the players to co-operate.
73
Whats the difference between overt and tacit collusion?
Overt collusion occures when firms formally agree to fix prices to maximise communal outcome.
Tacit collusion occures when there is no formal agreement between firms, but they collude via non direct manners such as price leadership.
74
What is a cartel?
An example of overt collusion - an agreement between firms in which prices and output is fixed, with the intention of maximising their joint profits.
75
What is opec? How do they collude and who are the cheaters?
Opec - organisation of petroleum exporting countries - is a cartel of 12 states which overtly collude to maximise profit from oil. They agree to artificially raise prices - although they cannot do this directly as oil is a homognous good, the member countries have production quotas to limit supply and drive up global oil prices. Iraq, Kazakhstan, and Russia are consistently mentioned by OPEC as the countries most out of compliance, with average overproduction totaling 621 million barrels per day.
76
Example of overt collision in british supermarkets and the repercussions they got?
The big four supermarkets in the UK were fined £116 million for overtly colluding to raise the price of milk (2007)
77
What does the UK competition act do to limit collusion?
Whoever snitches on the collusion gets no punishment (cant trust the other partner)
Fines of 10% of turnover
78
What is price leadership?
Where a dominant firm in an oligopoly sets the price and other firms follow, as they are fearful of engaging in a price war.
79
What are some methods of non price competition?
* Devlop brand loyality through advertising the quality of their product - Apple and Samsung
* Celebrity endorsements encourage brand loyality - Nike basketball shoes (Lebron James and Kevin Durant)
* Loyality card systems - nectar cards and tesco club cards
* Packaging - laundry detergants
80
What factors would cause an olgopolistic market to be competitive?
* If there are a large number of firms, as it would be difficult to reach a formal agreement
* If there are low barriers to entry and the market is contestable, the artifical supernormal profits would provide too great an incentive for new entrants into the market
* if one firm has significant cost advantages it makes agreeing on a set price harder
* If a wide range of substitutes exist for the good
81
What factors would make a collusive oligopoly more attractive?
* Small number of dominant firms (high concentration ratio)
* Similar costs
* high barriers to entry, making the market less contestable
* Ineffective competition policy
* High degree of consumer loyality and intertia, as this reduces the effectiveness of cheating on the agreement and thus makes it less incentivising.
82
What are the different price objectives a firm could adopt?
* Profit maximisation - MC = MR
* Revenue maximisation - MR=0
* Sales maximisation - AC = AR
* Other objectives (profit satisficing, social objectives)
83
What are price wars and why are they rare in an oligpoly?
When firms lower prices in a bid to snatch market share away from competitors. This stratergy is rare as according to the kinked demand curve model, all it does is lower profits for all firms involved whilst making limited impact on market share as firms are interdepndent
84
What is predatory pricing?
When a firm sets a price below average variable cost as a means to drive competition out the market. If the competitor dosnt lower price, it will lose market share, but if it does, the smaller competitor will constantly lose money and go bankrupt. This allows the remaining firm to gain monopoly power and set prices back up again. To do this, the firm must be large enough to sustain losses in the short run
85
What is the Areeda-Turner principle?
The legal definition of predatory pricing - if price is set below AVC, the firm would conventionally shut down due to the Shut down point principle. Therefore, if the firm is setting prices below AVC, the only motive to do so would be to drive competition out of the market.
86
What is limit pricing?
The highest price that an exisiting firm can set, but at which makes new entry into the market non profitable
87
Explain how limit pricing works
A firm has some price setting power, and is maximising profit by charging P* Q*, and is making healthy supernormal profits. If barriers to entry into the market are weak, this supernormal profit would attract a new entrant into the market. If this new firm joins the market, and is producing at a small scale, market price would fall as quantity in the market rises. The new firm is making normal profits. However, if the original firm charged the new price to begin with, any new entrant into the market would surpress prices even further which would make entry not profitable, as the new firm does not benefit from economies of scale to the extent the original firm does. Thus, although the firm does not experience supernormal profits to the extent it did before, it benefits from reduced competition in the market.
88
What are the benefits of allocative effiency to the consumer and producer? which market structures are allocatively efficient?
Consumers - resources are fully allocated to consumer demand, which maximises consumer surplus. Prices are low and quantity is at optimal levels
producers - by producing exactly what consumers want, they will experience high demand for their products.
Only perfect competition is allocatively efficient in the long run.
89
What are the benefits of productively effienct to the consumer and producer? which market structures are productively efficient?
consumer - if the low costs are passed on to consumers, consumers may benefit from lower prices. this will increase consumer surplus.
Producer - greater output at a lower average cost means economies of scale are being fully exploited. this can translate into greater levels of profit. In addition, if lower cuts are passed down to consumers, this means that prices are lower so demand should be higher, meaning market share can be maximised.
Only perfect competion is productively efficient in the long run
90
What are the benefits of dynamic effiency to the consumer and producer? which market structures are dynamically efficient?
consumers - recieve a greater variety of products which are of higher quality, and in the long run ac may be lower meaning lower prices
producers - profits are maximised in the long run, and because innovation increased demand the firm can stay ahead of rivals and cement its market share.
Monopolies and oligopolies are dynamically efficient in the long run.
91
What are the benefits of x effiency to the consumer and producer? which market structures are x efficient?
consumer - lower prices as firms are not wasting resources
producer - costs are lower so profit is higher, and lower prices can increase market share
only perfect competition is x efficient in the long run
92
What is contestability?
Contestability is the threat of new firms entering the market
93
What is a hit and run entry?
Where a firm enters a market to make short run supernormal profit before leaving with no sunk costs.
94
What the characterisitics of a contestable market
low barriers to entry or exit
good informartion surrounding market conditions
no sunk costs
95
Examples of contestable markets?
Fidget spinners - hit and run entrants
Ai - deepseek
96
What are the implications of contestability for the pricing stratergy of firms?
In a highly contestable market, exisitng firms always face the threat of new entrants into the market. This threat is sufficient to keep prices at or very near AC=AR, so there are no supernormal profits which act as an incentive for neew firms to join the market. If firms are operating at sales max rather than profit max, there is a high degree of contestability.
97
What are the benefits and negatives of contestable markets?
Pros:
* Allocative efficiency
* Jobs will be created
* closer to MES
Cons:
* Loss of dynamic effiency
* May translate to monopoly behaviour in the long run if contestability is not sustainable
* jobs will be low skill (a requirement for low barriers to entry
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Examples of barriers to entry or exit?
* High start up costs
* high sunk costs
* economies of scale
* Natural cost advantage
* legal barriers to entry such as copyright or food saftey legislation
* marketing barriers - high brand loyality
* limit pricing
* product differentiation
* asymetric information.
Economics
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Decks in class (8)
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