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Economics IB HL > 2.11 Market Failure - Market Power (theory Of The Firm ) > Flashcards

2.11 Market Failure - Market Power (theory Of The Firm ) Flashcards

1
Q

What is perfect competition, the components, and the graph

A

A situation in a market which buyers and sellers are so numerous and well informed that all elements of monopoly are absent

Components:
- homologous products
- large number of firms
- producers have no infelices on price
- no barriers to entry

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2
Q

Positives of perfect competition

A

Allocative efficiency

Low prices for consumers

Competition leads to the closing down of inefficient producers

The marker responds to consumer tastes

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3
Q

Negatives of the perfect competition model

A

Unrealistic assumptions

Cannot take advantage of economies of scale

Lack of product variety

Limited ability to engage in new product development

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4
Q

What is monopoly, the components, and the graph

A

Situation where there is a single seller in the market

Components:
- higher barriers to entry
- price setting ability
- economies of scale

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5
Q

Criticisms of monopoly

A

Welfare loss, allocative inefficiency and market failure

Higher price and lower output in monopoly

Loss of consumer surplus to monopolist

Negative impacts on the distribution of income

Lack of competition may give rise to higher costs

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6
Q

Potential benefits of monopoly

A

Economies of scale

Natural monopoly

Research and development for product development and technological innovation

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7
Q

When is profit maximization

A

MC = MR

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8
Q

When is revenue maximization

A

When MR = 0

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9
Q

What is total revenue + calculation

A

Total earnings of a firm from sale of output

TR = P * Q

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10
Q

What is marginal revenue + calculation

A

Additional revenue of a firm arising from the sale of additional unit of output

MR = change in TR / change in Q

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11
Q

What is average revenue + calculation

A

Revenue per unit of output

AR = TR/Q

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12
Q

What are explicit costs

A

Bills a business must directly pay e.x rent

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13
Q

What are implicit costs

A

Costs that are not directly paid but implied e.x entrepreneur gives up wages that they could’ve earned working for someone else

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14
Q

What is total costs

A

Sum of all explicit and implicit costs

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15
Q

What are average total costs

A

Total cost per unit of output

AC = TC/Q

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16
Q

What is marginal cost + calculation

A

The change in cost arising from one additional unit of output being produced

MC = change in TC / change in Q

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17
Q

What are long-run average costs

A

U-shaped curve showing average costs in lung run when all firms inputs are variable

18
Q

What is profit

A

TR - TC

19
Q

What is normal profit

A

Occurs when total revenue equals total costs and is the minimum amount of revenue required by a firm to keep running

20
Q

What is abnormal profit

A

Profit that results when total revenue is greater then total costs. It is the revenue that is over and above normal profit

21
Q

What are losses

A

Negative profit; occurs when total revenue is less then total costs

22
Q

Monopolistic competition definition, components and graph

A

Type of market structure where many companies are present in an industry and produce similar but differentiated products

Components:
- low barriers to entry
- large number of firms
- product differentiation
- price setting ability
- less inelastic demand curve then monopoly

23
Q

Comparison of monopolistic competition and perfect competition

A

Similarities:
- large number of firms
- free entry of firms into an industry
- normal profit in lung run, abnormal profit or loss in the short run

Differences:
- market power and demand curve
- allocative effeciency
- product variety
- economies of scale

24
Q

Comparison of monopolistic competition and monopoly

A

Similarities:
- no allocative efficiency therefore a form of market failure

Differences:
- number of producers
- size of firms
- barriers to entry
- normal and abnormal profits
- competition and prices
- market power
- competition and costs
- research and development
- economies of scale
- product variety

25
Q

Oligopoly definition and components

A

A state of limited completion, in which a market is shared by a small number of producers and sellers

Components:
- high barriers to entry
- small number of large firms
- firms are interdependent
- price setting ability
- Homogenous products

26
Q

Do oligopoly make price changes

A

No rarely, due to high price fragility

27
Q

What does game theory illisutrate

A

The interdependence and strategic behavior of oligopolies

28
Q

What is a price war

A

When rival firms match price cuts, then all firms end up with lower prices and lower profits

29
Q

Ways an oligopoly engages in non-price competition to increase their market share

A

Product development
Advertising
Branding
Customer service, warranties, provision of credit, discounts

30
Q

2 types of oligopoly

A

Collusive oligopoly

Non collusive oligopoly

31
Q

What is collusive oligopoly and the 2 types

A

Situation where firms agree to from an agreement between themselves to limit competition, increase market power and increase profits e.x cartels, they limit competition between the member firms and attempt to maximize joint profits

Formal collusions —> firms make formal agreement to stick to high prices, can involve the creation of a cartel

Tacit collusions —> firms make informal agreements or collude without speaking to rials

32
Q

Benefits of collusion

A
  • increased market power and ability to control price of products
  • increased profits due to higher prices
  • elimination of competition
33
Q

What are non-collusive oligopoly

A

Refers to oligopolistic firms that do not collude in any way

34
Q

What is concentration ration and what does it measure

A

Provides indication of the percentage of output produced by the largest firms in an industry and it measures market concentration

35
Q

Criticism of oligopoly

A
  • welfare loss, allocative efficiency and market failure
  • higher prices and lower quantities of output then under competitive conditions
  • loss of consumer surplus to oligopolies due to higher prices
  • negative impacts on redistribution of income
  • may be higher production costs due to lack of competition
  • possibly less innovative
36
Q

Benefits of oligopoly

A
  • economies of scale can be achieved , lower production costs
  • product development and technological innovations can be perused due to abnormal profits
  • technological innovations improve efficiency and lower costs of production, which may be passed to consumers in the form of lower prices
37
Q

Advantages and risks of large firms with significant market power

A

Advantages:
- advantages arising from large economies of scale
- ability of such firms to carry out R&D on new product and technology development

Risks:
- allocative inefficiency and welfare loss
- higher prices and lower output
- loss of consumer surplus to the large firms
- negative impact on the distribution of income
- higher average costs due to lack of competition
- possible less innovative

38
Q

What is abuse of market power and give examples

A

Situations where firms engage in activities that result in reduced competition

Examples:
- charging high prices
- depriving smaller competitors by selling at very low prices

39
Q

Government intervention in response to abuse of market power

A

Legislation and regulation

Fines

Government ownership

40
Q

Explain the intervention of legislation to protect against the abuse of of market power

A

Legislation to protect competition —> firms found guilty of anti-competitive behavior are asked to pain fines or may be broken up into smaller firms

Difficulties of legislation to protect competition:
- if firms collude it is difficult to discover evidence of the collusion
- enforcing laws may be time consuming and governments may not want to enforce them strictly

Legislation in the case of mergers —> a merger is an agreement between 2 or more firms to join together and become a single firm - legislation will set limits on the size of combined firms

41
Q

Explain the intervention of fines to protect against the abuse of of market power

A

Imposed on firms undertaking anti-competitive behavior

Problems:
- breaking the law may be cheaper then the fine and prove more beneficial
- profits of firms that abuse market power are great enough that they are better off paying the fines

Economics IB HL (31 decks)

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