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microeconomics > 1.5 perfect competition, imperfectly competitive markets and monopoly > Flashcards

1.5 perfect competition, imperfectly competitive markets and monopoly Flashcards

1
Q

monopoly

A

only one firm in the market

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2
Q

legal monopoly

A

over 25% market share

e.g. Tesco 29%

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3
Q

3 simplifying assumptions used to model monopolies

A

only one firm

high barriers to entry

firm is profit maximiser

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4
Q

profit maximiser

A

where MC+MR

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5
Q

only one firm

A

100% market share

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6
Q

higher barriers to entry

A

otherwise new firms join the market

e.g. Microsoft using patents to prevent other firms using similar technology

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7
Q

monopoly barriers to entry

A

legal barriers
sink costs
internal economies of scale
brand loyalty

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8
Q

how to legal barriers stop new firms entering the marker?

A

includes patents, copyrights, trademarks

they stop new firms using ideas of incumbent firms
(already in market)

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9
Q

how do sunk costs prevent new firms from entering the market?

A

money can’t be recovered if firms leaves the market

e.g. specialist machinery and advertising as you can’t resell specialist machinery

high sunk costs increase the cost of failure

if firm enters market and leaves, can’t recover sunk costs

deters new firms from entering

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10
Q

how do internal economies of scale prevent new firms from entering the market?

A

big firms use internal economies of scale to reduce LRAC

competitive advantage over smaller firms, able to produce much cheaper

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11
Q

how can technical economies of scale prevent new firms from entering the market?

A

can be used to produce things at a very low cost

small firms can’t afford the machinery

get to keep costs and prices very low creating a high barrier to entry

can’t compete with low prices

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12
Q

how can brand loyalty prevent new firms from entering the market?

A

strong branding from incumbent firms makes it impossible for new firms to enter the market

e.g. Coca Cola spends lots of money on advertising and when Virgin Cola entered the market it struggled

discontinued completely in 2014

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13
Q

example of brand loyalty causing new firms to fail

A

e.g. Coca Cola spends lots of money on advertising and when Virgin Cola entered the market it struggled

discontinued completely in 2014

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14
Q

productive efficiency

A

MC=AC

average total cost is at its lowest

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15
Q

allocative efficiency

A

welfare is maxmised
MC=AR=price=D
cost to producers of producing good matches price consumers are willing to pay

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16
Q

X-inefficiency

A

when a firm is producing above its average cost curve for a given level of output

monopolies can get lazy

costs could be higher due to poor management and excessive bonuses

costs of raw materials too high, accidents

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17
Q

dynamic efficiency

A

AR>ATC, money left over to invest

need supernormal profit to invest in research and development

how changing technology improves a firm’s output potential over time

e.g. how phones went from brick to small

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18
Q

which efficiencies are monopolies?

A

productively efficient

allocatively inefficient

possibly dynamically inefficient

X-inefficient

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19
Q

natural monopoly

A

when it’s naturally most efficient if only one firm is in the market

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20
Q

example of natural monopoly

A

london transport network

would be very inefficient if London had multiple transport network, it’s most efficient to just have one (like TFL)

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21
Q

why do the government support and own monopolies if they are inefficient?

A

natural monopoly argument

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22
Q

natural monopoly argument

A

there are high sunk costs

huge internal economies

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23
Q

estimated sunk costs of London’s transport system

A

estimated at £129bn

another firm to enter market would have to pay high costs

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24
Q

how could TFL use internal economies of scale?

A

could use technical economies of scale like oyster card and self service ticket machines to reduce amount of workers needed

purchasing economies to buy fuel in bulk and transport trains and buses at lower costs

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25
Q

minimum efficient scale

A

where LRAC is at its lowest

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26
Q

constant marginal cost simplification

A

MC initially decreases because as output increases and more workers are hired, they can specialise, increasing productivity and decreasing marginal cost

but MC will then increase because diminshing marginal returns will decrease productivity, increasing MC

when MC is constant, MC will be a straight line and MC=AC

economists can assume MC is constant

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27
Q

price discrimination

A

when a firm charges different prices for different consumers for the same good

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28
Q

example of price discrimination

A

e.g. student discounts

in education, poorer elastic students can get scholarships

29
Q

which consumers are likely to be charged higher prices and why?

A

consumers with higher income as they are less responsive to a change in price

30
Q

which consumers are likely to be charged a lower price and why?

A

lower income consumers as they are more responsive to a change in price (elastic)

31
Q

3 conditions of price discrimination (monopolies)

A

market power

information

limit reselling

32
Q

why do monopolies need market power?

A

so that the firm has enough market share to change prices without losing all consumers

33
Q

why do monopolies need information?

A

they need to know which consumers are elastic and inelastic

34
Q

why do monopolies need to limit reselling?

A

it can ruin price discrimination

the firm will lose out on profit as the consumer doesn’t pay the higher price like they are supposed to

35
Q

real life example of why monopolies need to limit reselling

A

students can buy student priced tickets and resell them to an adult for a price cheaper than the adult ticket

can be countered with making carrying student IDs compulsory

36
Q

what does price discriminating increase?

A

firm’s profits

37
Q

characteristics of a market

A

number of firms

concentration ratio

barriers to entry

info available

product differentiation

pricing

38
Q

what is a firm’s most rational decision?

A

profit maximisation

MC>MR

39
Q

perfect competition

A

opposite of a monopoly

market structure with many buyers and sellers

no barriers to entry or exit

homogenous goods

perfect information

40
Q

market

A

where consumers and producers buy and sell, market is huge

Q=millions

41
Q

firm

A

represents 1 of just many producers

Q=10s

42
Q

what does the demand curve of s perfectly competitive market look like and why?

A

perfectly straight horizontal line

putting price up by just a bit means firm will lose all consumersha

43
Q

what are perfectly competitive firms?

A

price takers

44
Q

perfectly competitive firms in the short run

A

losses

firms will leave as there are no barriers to exit

prices go back up

profit covers opportunity cost

45
Q

perfectly competitive firms in the long run

A

can only make normal profit

supernormal profits incentivise other firms to join the market

supply continues to increase

long run equilibrium reached as firms can no longer make supernormal profit

46
Q

key features of oligopolies

A

a few large sellers

high barriers

differentiated goods

interdependence

47
Q

price war

A

when firms repeatedly reduce their prices below that of their competitors with the aim of offering the lowest price in the market

benefits consumer as leads to a lower price

bad for profits

48
Q

collusion

A

when 2 or more firms agree to limit competition

49
Q

overt collusion

A

a formal agreement between firms

50
Q

tacit collusion

A

an unspoken agreement between firms

51
Q

non collusive oligopoly

A

where firms in an oligopoly industry compete on prices in order to undercut the other firm and gain market share

52
Q

collusive oligopoly

A

where firms in an oligopoly industry set the same prices either through tacit or overt collusion

53
Q

whistleblowing

A

can lead to immunity and protection from fines

54
Q

price agreement

A

occurs as a result of overt collusion

55
Q

price leadership

A

when one firm changes their prices and other firms follow

tacit collusion is the result of price leadership

56
Q

cooperation

A

when firms work together for mutual benefit

legal

57
Q

3 methods of price competition in oligopolies

A

price wars

predatory pricing

limit pricing

58
Q

price competition

A

when firms compete by changing prices

59
Q

non price competition

A

firms compete without changing prices

60
Q

price wars

A

when firms try to undercut each other with lower prices to steal the other firms’ consumers

can be dangerous and lead to very low prices

61
Q

predatory pricing

A

price dropped before short run shutdown point (AVC=AR)

competitors can’t compete

firms go bust and have to leave market

leads to losses in short run but in long run helps to get rid of competition so can increase price and take over market

62
Q

limit pricing

A

incumbent firm sets price low enough to limit new firms from entering market

uses its economies of scale

barrier to entry

63
Q

non price competition

A

firms compete without changing price

64
Q

advertising

A

can criticise other firms with adverts

65
Q

loyalty cards

A

can get money off

encourages customers to spend more and come back

66
Q

branding

A

lures customers towards their brand

67
Q

quality

A

can invest into r&d and increase dynamic efficiency and develop higher quality products

to increase quality firms need supernormal profits AR>AC

68
Q

uncertainty

A

when oligopolistic firms make decisions they have to deal with uncertainty

this is because decisions by one firm in the industry impact all the other firms

hard to predict decisions

microeconomics (8 decks)

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