2.11 Market Structure Flashcards
What does the degree of competition in the market tell us?
It indicates the characteristics of good service and whether the market is capable of achieving socially optimal and collectively efficient levels of production.
What are the four market structures?
- Perfect Competition
- Monopolistic Competition
- Oligopoly
- Monopoly
What does ATC tell us?
It indicates if firms are making a profit.
What characterizes perfect competition?
- Many sellers
- Homogeneous products
- No price-setting power
- Sellers are price takers
- Perfectly elastic demand
What happens in the long run regarding ATC in perfect competition?
ATC can go down due to economies of scale and may start increasing due to diseconomies of scale.
implicit costs vs explicit
implicit: Opportunity costs associated with an entrepreneur’s normal profit from economic activity.
Explicit: Monetary payments made to owner of land, labour, and capital in resource market.
Fill in the blank: In the long run, breaking even occurs when _______.
ATC = MR
True or False: In monopolistic competition, firms have some price-setting power.
True
What is the market structure with the least competition?
Monopoly
What occurs when more people enter the market?
Supply shifts, causing firms to break even in the long run.
What is the condition for profit maximization in perfect competition?
MR = MC
What does the term ‘profit maximization’ refer to in perfect competition?
The goal of firms to maximize their profits by producing where MR equals MC.
What is the result of a market at socially optimal output level?
MSB = MSC
What is the relationship between marginal utility and marginal cost?
MC goes down and then up based on marginal utility returns.
How does total cost change with output?
TC increases as output increases
What does marginal cost represent?
Costs of additional unit of output tends to increase
This is due to the law of diminishing marginal returns.
How does marginal cost help producers?
Marginal cost helps producers know the optimal level of output to produce
What does average cost indicate?
Average cost helps tell if a firm is making a profit or loss
What is average cost?
Average cost is the per unit cost of production
What does marginal revenue represent?
MR is the income gained by selling an additional unit
What does comparing MR to MC indicate?
It tells producers if an increase in output leads to a decrease/increase in profits
In perfect competition, what is the relationship between MR and price?
MR = P for each additional unit of output sold
In a monopoly, what is the relationship between MR and price?
MR < P; to sell additional units, producers need to lower prices
What is average revenue (AR)?
AR = price output sells for
What is the profit maximization rule?
MR = MC for profit earning; TR < TC for loss
How do you find profit-maximization level of output?
Consider per-unit costs and MR / MC
What is the condition for minimizing level of output?
MC = AC (per-unit cost)
What is abnormal profit?
Abnormal profit occurs when firms cover all explicit and implicit costs of production
What is normal profit?
Normal profit occurs when economic profit is zero or when revenues equal explicit and implicit costs
What happens when market price falls?
It causes profit-maximizing level of output to be the same as AC (breaking even)
What happens when market price equals a firm’s minimum average total cost (ATC)?
The firm earns normal profit.
This indicates that the firm is covering all its costs, including implicit ones.
What situation occurs when market price is less than average cost (AC)?
The firm is minimizing its economic losses.
In this scenario, the firm cannot cover its implicit costs.
What occurs if a firm’s losses exceed its fixed costs?
The firm will shut down.
This is a critical decision point for firms experiencing sustained losses.
What is the primary objective of firms in terms of profit maximization?
Producing where marginal cost (MC) equals marginal revenue (MR).
This is the condition for profit maximization in economic theory.
What are alternative business objectives that drive firm behavior?
- Corporate Social Responsibility
- Increasing Market Share
- Satisfying stakeholders
Firms may prioritize these objectives over strict profit maximization.
What is Corporate Social Responsibility (CSR)?
When a business engages in activities not aimed at maximizing profits but instead to support the community.
Firms engaged in CSR may satisfy stakeholders to promote further business needs.
How does increasing market share relate to profits?
It is a way to increase profits by sacrificing short-term profits to attract customers from competitors.
Over time, this strategy can lead to higher profits as market share grows.
What is the result of abnormal profit in perfectly competitive markets?
Attracts new firms into the market
Abnormal profits lead to increased output as firms enter the market to capitalize on profits.
What happens to market supply when firms increase output in response to profits?
Market supply will increase
This increase in supply drives the equilibrium price down until no abnormal profits exist.
What condition must be met for allocative efficiency in a market?
MSC = MSB
This means that the marginal social cost equals the marginal social benefit.
What is a characteristic of monopolistic markets?
One seller with total domination
Monopolistic markets have no close substitutes and significant price-setting power.
True or False: Monopolies have no need to improve because there is no competition.
True
Monopolies can maintain their market position without pressure to innovate or reduce prices.
Fill in the blank: In imperfect competitive markets, producers produce at a level of output _______ than socially optimal.
lower
This underallocation of resources leads to a transfer of surplus from consumers to producers.
What are some barriers to entry in monopolistic markets?
Legal barriers, economies of scale, control of key resources
These barriers prevent competition from entering the market.
What happens to equilibrium price when new firms enter a perfectly competitive market?
It is driven down
New firms increase supply, which reduces prices until only normal profits are made.
What happens to the quantity demanded when prices increase in a monopoly?
Less quantity demanded
In a monopoly, what is the relationship between the marginal revenue curve and the demand curve?
MR curve is twice as steep as the demand curve
What must a monopolist do to sell additional units?
Decrease the price for all outputs
How does profit maximization differ between monopolies and competitive firms?
Monopolies can maintain abnormal profits in the long run
What is a key characteristic of competitive markets compared to monopolistic markets?
Competitive markets produce more output at lower prices
What is the effect of monopolies on allocative efficiency?
Monopolies are allocatively inefficient
What is the consequence of monopolies restricting output?
Under-allocation of resources
What leads to deadweight loss (DWL) in monopolistic markets?
Less consumer surplus due to higher prices and lower output
True or False: Monopolies achieve allocative efficiency.
False
Fill in the blank: Monopolies tend to restrict output to ________ than competitive markets.
Lower levels
What is the social optimum condition for output in a competitive market?
MC = MB
Do monopolies always earn profits?
No, monopolies do not always earn profits.
Monopolies can be subject to changes in demand and costs, which can eliminate abnormal profits.
What can lead to a decrease in a monopolist’s profits?
A decrease in demand can lower monopolist’s profits.
This can cause prices to drop and lead to breaking even or normal profit.
What happens when there is an increase in marginal costs for a monopoly?
It can lead to economic loss.
Increased regulation or taxes can raise costs, eliminating profits.
What is a natural monopoly?
An industry where a single firm produces all outputs due to large economies of scale.
This occurs when the demand for the good is low relative to the fixed costs.
What are legal reasons for a monopoly to exist?
- Exclusive permit from the government
- Firm has cornered the market
- Firm has priced competitors out of the market
These conditions can create barriers to competition.
Fill in the blank: A monopoly is considered a market failure because resources are _______.
under-allocated.
What does an increase in average cost (AC) indicate for a monopoly?
It can lead to economic losses.
Higher AC may require firms to reduce costs or increase demand to be profitable.
What is the condition for a monopoly to achieve profit maximization?
The firm must manage costs and increase demand effectively.
What is a natural monopoly?
A market condition where a single firm can supply a product more efficiently than multiple competing firms.
What happens to consumer surplus in a natural monopoly without government intervention?
It is lost.
For natural monopolies to produce at a socially optimal level, what should be imposed?
Subsidies or price controls.
What does the equation Mc = Mb represent in the context of monopolies?
It indicates the equilibrium where marginal cost equals marginal benefit.
What is the effect of a price ceiling at the socially optimal level?
The firm increases output to the socially optimum level.
What is a problem associated with price ceilings at the socially optimal level?
The price is lower than average cost, leading to economic loss.
What happens to a firm in the long run if it experiences economic losses?
It will shut down.
What does a ‘fair return’ price ceiling do?
It is set where the natural monopoly company makes normal profits.
What is the effect of a fair return price ceiling on demand?
It increases the quantity demanded.
What is meant by ‘breaking even’ in the context of price ceilings?
The firm earns normal profit without needing subsidies.
What characterizes monopolistic competition?
Many sellers, slightly differentiated products, considerable non-price competition
Firms compete through product differentiation rather than price wars.
What is a key feature of products in monopolistic competition?
Slightly differentiated products
The differences in products can lead to a form of monopoly.
What are the barriers to entry in monopolistic competition?
Relatively easy entry
This allows new firms to enter the market without significant challenges.
What type of competition is prevalent in monopolistic competition?
Considerable non-price competition
Firms focus on marketing, branding, and product features.
What happens to profits in the short run for firms in monopolistic competition?
Abnormal profits
This occurs due to low barriers to entry and initial demand.
What is the result of demand shifting to the left in monopolistic competition?
Lower profits
This occurs as the marginal cost intersects with the marginal revenue at a lower quantity.
What is the long-run outcome for firms in monopolistic competition?
Normal profits
In the long run, new firms enter the market, leading to a more elastic demand.
What does the long-run equilibrium in monopolistic competition achieve?
Break-even point
More firms enter the market, shifting demand to the right.
What is the relationship between demand and marginal cost in monopolistic competition?
D = MC
Firms should produce at a level where demand equals marginal cost for optimal efficiency.
What is a characteristic of monopolistic competition regarding product variety?
Greater choice/variety
Firms differentiate their products to attract consumers.
What are the two types of efficiency that monopolistic competition seeks to achieve?
Allocative efficiency and productive efficiency
Allocative efficiency occurs when D = MC; productive efficiency occurs when D = minimum AC.
What does the term ‘excess capacity’ refer to in monopolistic competition?
Firms producing at lower prices and not at full capacity
This indicates that firms could produce more without incurring additional costs.
How does monopolistic competition differ from monopoly in terms of profits in the long run?
Monopolistic competition results in normal profits, while monopoly can achieve abnormal profits
Monopolies benefit from economies of scale and restrict output.
True or False: Firms in monopolistic competition have an incentive to differentiate their products.
True
This differentiation helps firms to compete without engaging in price wars.
Fill in the blank: In monopolistic competition, firms produce where _______ equals marginal revenue.
Marginal cost
What characterizes monopolistic competition?
Many sellers, slightly differentiated products, considerable non-price competition
Firms compete through product differentiation rather than price wars.
What is a key feature of products in monopolistic competition?
Slightly differentiated products
The differences in products can lead to a form of monopoly.
What are the barriers to entry in monopolistic competition?
Relatively easy entry
This allows new firms to enter the market without significant challenges.
What type of competition is prevalent in monopolistic competition?
Considerable non-price competition
Firms focus on marketing, branding, and product features.
What happens to profits in the short run for firms in monopolistic competition?
Abnormal profits
This occurs due to low barriers to entry and initial demand.
What is the result of demand shifting to the left in monopolistic competition?
Lower profits
This occurs as the marginal cost intersects with the marginal revenue at a lower quantity.
What is the long-run outcome for firms in monopolistic competition?
Normal profits
In the long run, new firms enter the market, leading to a more elastic demand.
What does the long-run equilibrium in monopolistic competition achieve?
Break-even point
More firms enter the market, shifting demand to the right.
What is the relationship between demand and marginal cost in monopolistic competition?
D = MC
Firms should produce at a level where demand equals marginal cost for optimal efficiency.
What is a characteristic of monopolistic competition regarding product variety?
Greater choice/variety
Firms differentiate their products to attract consumers.
What are the two types of efficiency that monopolistic competition seeks to achieve?
Allocative efficiency and productive efficiency
Allocative efficiency occurs when D = MC; productive efficiency occurs when D = minimum AC.
What does the term ‘excess capacity’ refer to in monopolistic competition?
Firms producing at lower prices and not at full capacity
This indicates that firms could produce more without incurring additional costs.
How does monopolistic competition differ from monopoly in terms of profits in the long run?
Monopolistic competition results in normal profits, while monopoly can achieve abnormal profits
Monopolies benefit from economies of scale and restrict output.
True or False: Firms in monopolistic competition have an incentive to differentiate their products.
True
This differentiation helps firms to compete without engaging in price wars.
Fill in the blank: In monopolistic competition, firms produce where _______ equals marginal revenue.
Marginal cost
What is an oligopoly?
A market structure characterized by few sellers.
What is the effect of one seller’s action in an oligopoly?
It affects other sellers.
What types of products are typically found in an oligopoly?
Differentiated or homogeneous products.
What are barriers to entry in an oligopoly?
Difficult entry.
What type of power do firms in an oligopoly have?
Considerable price-setting power.
What is non-price competition in an oligopoly?
Competition in ways other than price.
What is collusion in the context of oligopolies?
When firms work together, often illegally.
What is a cartel?
A formal agreement among firms in an oligopoly to fix prices or output.
What is informal collusion?
When a single firm establishes price leadership without specific agreements.
What happens when smaller firms follow the price set by a price leader?
They typically set a general price level.
What is a strategic environment in an oligopoly?
Constantly analyzing possible decisions taken by rivals.
What is the disadvantage of oligopoly regarding allocative and productive efficiency?
Lack of allocative and productive efficiency.
What economic advantage can oligopolies provide?
Continuous abnormal profits due to barriers to enter.
What can result from continuous abnormal profits in oligopolies?
Increased research and development, better products, more choice, and lower prices.
What methods do governments use to control market power in oligopolies?
Legislation and regulation.
What are anti-monopoly laws?
Laws aimed at preventing monopolistic practices.
Fill in the blank: Oligopolies can lead to _______ due to their market power.
Collusion.
True or False: Non-price competition is not essential in an oligopoly.
False.
What is government ownership?
The control of industries or assets by the state or government.
Government ownership often involves the nationalization of industries.
What does nationalization refer to?
The process of transforming private assets into public assets by bringing them under the control of the government.
Nationalization can occur in various sectors, including utilities and transportation.
What is the purpose of nationalizing industries?
To achieve social welfare gains or address past injustices.
This is often seen in contexts where the government aims to redistribute wealth or provide essential services.
Fill in the blank: Industries being nationalized can lead to _______.
[settlement welfare gains].
True or False: Nationalization always leads to increased efficiency in industries.
False
Nationalization can lead to inefficiencies due to lack of competition.
What types of goods might be involved in government ownership?
Goods that are essential for public welfare, such as utilities and transportation.
These goods are often prioritized to ensure access for all citizens.
What role does police play in the context of nationalized industries?
To guard and regulate industries that are under government ownership.
This ensures compliance with laws and protection against misuse.
What are fines in the context of government ownership?
Monetary penalties imposed for violations of regulations governing nationalized industries.
Fines serve as a deterrent against non-compliance.
