Using transport examples throughout, explain the impact of market structure on economic efficiency and the ability of firms to set prices and make profits

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Using transport examples throughout, explain the impact of market structure on economic efficiency and the ability of firms to set prices and make profits

Economic efficiency is the use of resources in such a way as to maximise the production of goods and services. The structure of a market, its profitability, prices and output can affect its economic efficiency.

There are four main types of efficiency to consider; productive efficiency, allocative efficiency, dynamic efficiency and X-inefficiency. Productive efficiency is at its maximum when the level of production is at the minimum of the Average Cost curve. Productive efficiency is at its maximum when price is equal to marginal cost.

Dynamic efficiency is through the generation of abnormal profits (AR>AC), that are invested for future development. X-inefficiency is when a firm is not operating at minimum cost, due to organisational slack.

Using the market structure of perfect competition as an example, there are many small firms producing homogenous goods, thus it is fragmented as opposed to concentrated. In the transport industry the local coach travel market represents the model of perfect competition quite well.

No one firm can set of affect the price level, and so the firms are referred to as 'price-takers'. If a firm decided to sell their good or service at a price higher than that of others, consumers would simply demand from another supplier due to the homogenous nature of the good or service. If a firm sold their goods/services at a price less that the market selling price, then they would simply make losses. Because of this, there is one market selling price at all levels of output, and so the demand curve is horizontal, matching with the average revenue and marginal revenue curves.

Another condition of perfect competition is that of perfect information, consumers are aware of other firms within the market from which they could purchase homogenous goods if one firm prices too high. There are also no or low barriers to entry; in reality there are always barriers to entry, however in the perfect competition is a theory and so no barriers to entry is a condition of this theory. Using real life examples however, such as the local coach travel market, there are of course barriers to entry; however these can be low, such as hiring a coach and having a driver with sufficient health and safety licenses.
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In terms of economic efficiency, in theory, perfect competition achieves both productive and allocative efficiency and has no X-inefficiency.

Productive efficiency is reached in perfect competition because the profit maximising quantity of output is where the long-run average cost is at its minimum, and so production is at the lost unit cost. Allocative efficiency is reached because the cost of producing one more unit level of output is equal to the price, and so P=MC. It is also reached when consumer are provided with the goods and services which they want. X-efficiency or no X-inefficiency is reached ...

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