1.5 Perfect competition, imperfectly competitive markets and monopoly Flashcards
what is a market structure
a market structure is concerned with how the market is organised
what does market contestability mean
ease in which new firms can enter the market
in what conditions is there more contestability
lower barriers to entry
what happens when there’s more market power in a market
less efficiency
depict the spectrum of market structures.
each market structure can be characterised by (3)
- number of firms in the market
- the degree of product differentiation
- ease of entry into the market
- number of firms in the market
the more firms, the more competitive
- the degree of product differentiation
-if products are more differentiated than one another then the market will be less competitive. (as there’s less firms doing the same thing)
-In a perfectly competitive market, products are homogonous (same) so
products can be differentiated using price, branding, or quality - this affects the cross elasticity of demand (substitute/complement)
- ease of entry into the market
the number/degree of barriers to entry. Barriers to entry are designed to prevent new firms entering the market profitably. This increases producer surplus. Higher the barriers, the less competitive the market.
3 examples of how higher barriers to entry, the less competitive
economies of scale
brand loyalty - makes demand more inelastic (change in price doesnt change demand)
backwards vertical integration - acquiring a firm earlier in supply chain, this controls supply and means firms can control prices.
the most important objective of a firm
profit
traditional theory of the firm
maximise profits
how to calculate profit
total revenue - total cost
when do firms break even
TR=TC
the point in which profit maximisation occurs
Marginal cost (MC) = Marginal revenue (MR)
4 reasons why traditional theory of the firm is good (profit max)
- re-investment
- dividends for shareholders
- lowers costs and lowers prices for consumers
- rewards entrepreneurship
Can you draw the profit maximisation curve for imperfect competition and suggest 3 points to Why marginal cost = marginal revenue for profit maximisation
any quantity to the right of MC = MR cannot be maximising profit, marginal cost > marginal revenue. So any of those units to the right generate a loss and reduce profit.
if you stop at any quantity to the left of MC=MR, there would be no point in stopping because each extra unit will bring in more revenue i.e. more profit. So as long as MR>MC the next unit will generate more revenue and profit.
The point in which you stop is where no more extra profit can be made, where MC=MR.
reinvestment
pharmaceutical companies reinvest into R+D
dividends for shareholders
without shareholders finance there wouldn’t be a company so must reward them with dividends
lowers costs and lowers prices
costs low so profit high so can pass those lower costs on to consumers
rewards entrepreneurship
rewards risk taking activity
why traditional theory of the firm is bad, where firms decide not to profit maximise for certain reasons, such as
firms lack knowledge of Mc = Mr (firms don’t compute it)
Greater scrutiny
Key stakeholders harmed
and so (profit satisficing)
Other objectives more appropriate
firms lack knowledge of MC=MR
firms don’t compute it
greater scrutiny
large profits encourage regulators who may investigate and worsen the business environment e.g. suggestions to improve safety etc which may raise costs.
key stakeholders harmed ?
consumers? may suffer from worsened reputation
workers? workers could strike e.g. trade unions get involved, may raise costs further
gov? investigate and outcomes may be very anti business
environmental groups? protest and attack on social media
what is profit satisficing
sacrificing profit to satisfy as many key stakeholders as possible
why other objectives may be more appropriate
revenue maximisation
profit satisficing
sacrificing profit to satisfy as many key stakeholders as possible
revenue maximisation occurs when
MR=0
why does revenue maximisation occur when MR=0 , must look at both points to the right and left
any point to the right the MR will go negative, so extra revenue generated from one extra unit is negative which reduces revenue which cannot be revenue maximised.
any point to the left, where MR is positive wont revenue maximise because we can increase TOTAL revenue by producing more units until MR = 0.
reasons why revenue maximisation is at MR=0
QP - PP = profit max
QR - PR = revenue max
- economies of scale benefit - rev max qty > profit max qty therefore greater growth and lower average costs and lower average price for consumers
- predatory pricing - the monopolies rev price < profit max price - undercuts rivals and drives them out
- principle agent problem (behavioural economics) that there is a divorce between ownership and control. Owners (principles) are the shareholders but those who control (managers)
those who own do not control therefore managers run day in and day out. revenue max uses leverage to go to shareholders for greater perks in their job.
sales maximisation point
AC=AR
why sales maximisation is a good idea
however sales maximisation suggests businesses want to become as large as they possibly can be without making a loss which occurs at break even.
