Market Structures and Economic Efficiency

The video explores various market structures, including perfect competition, monopolistic competition, monopoly, and contestable markets. It discusses the economic efficiencies associated with each structure, such as allocative, productive, and dynamic efficiency. The video highlights how perfect competition achieves allocative and productive efficiency but lacks dynamic efficiency. Monopolistic competition offers product differentiation and potential dynamic efficiency but is not allocatively efficient. Monopoly is criticized for allocative inefficiency and x inefficiency, while contestable markets are seen as potentially more efficient due to the threat of competition.

What is the best definition of economic efficiency?

• When consumer needs are ignored in favor of producer needs

• When a market process leads to an optimum allocation of scarce resources

• When all firms in a market make supernormal profits

• When resources are allocated to maximize profits

In perfect competition, what happens when firms make supernormal profits?

• The market supply curve shifts inward

• New firms enter the market, increasing supply

• Firms exit the market

• Prices increase to maintain profits

Which type of efficiency is achieved when price equals marginal cost in perfect competition?

• Social efficiency

• Productive efficiency

• Allocative efficiency

• Dynamic efficiency

What is a key characteristic of monopolistic competition?

• Homogeneous products

• No entry or exit barriers

• Differentiated products with free entry and exit

• Single seller dominating the market

Why might monopolistic competition be considered dynamically efficient?

• Because of product differentiation and innovation

• Due to the presence of homogeneous products

• Because it achieves allocative efficiency

• Because it has no scope for innovation

In a monopoly, why is there a loss of productive efficiency?

• Due to pricing below marginal cost

• Because monopolies produce at the lowest point of the cost curve

• Because monopolies produce more than the market demands

• Because of lack of competition leading to higher costs

What is X-inefficiency in the context of a monopoly?

• When average costs are higher than necessary due to lack of competition

• When a firm produces at the lowest possible cost

• When firms achieve allocative efficiency

• When firms innovate to reduce costs

What is a key feature of contestable markets?

• High barriers to entry

• No threat of competition

• Potential for hit-and-run entry by new firms

• Monopoly pricing strategies

How do contestable markets compare to monopolies in terms of efficiency?

• They are less efficient due to high entry barriers

• They are more efficient due to the threat of competition

• They are equally efficient as monopolies

• They are inefficient due to lack of innovation

What can lead to a more economically efficient outcome in contestable markets?

• Increasing barriers to entry

• Opening up the market to new competition

• Maintaining monopoly power

• Reducing the number of firms