2.11a Market Power

Question 1

What is the definition of “market power”?

Answer 1

Market power refers to the ability to manipulate the price of a product, usually above the perfectly competitive level.

Question 2

What are the 4 market structures?

Answer 2

• Monopolistic Competition
• Monopoly
• Perfect Competition (PC)
• Oligopoly

Question 3

What is the “Perfect Competition” market structure?

Answer 3

PC is a market structure where there is intensive degree of competition, with no firm large enough to set the price or influence the quantity traded. Dependent on forces of demand and supply.
Extreme form of market structure so not really realistic, but we study it to be able to compare to other market structures.

It is considered as an “ideal” by economists.

Question 4

What is the “Monopoly” market structure?

Answer 4

Business Legal Definition of Monopoly: “25% market share”

Assumptions:
- 1 single firm or dominant firm in the market (eg. De Beers Company controls over 80% diamond sales)
- No close substitutes
- High barriers to entry (BLADE)
–> Branding, Legal, Anti-competitive prices, Dominance of resources, Economies of scale

Definition of 1 single firm in a market does not really exist (would be a “pure” monopoly)
(Bpost - monopoly in terms of letter, but not in terms of parcels)

Question 5

What is the “Monopolistic Competition” market structure?

Answer 5

1. Many small (or medium-sized) firms
2. Similar products but some differentiation
3. Low or no barriers to entry

Monopolistic competition is a mixture of PC and Monopoly characteristics

Question 6

What is the “Oligopoly” market structure?

Answer 6

• Few large firms which coexist with small firms
• Homogenous goods which are often only slightly differentiated
• Use brand loyalty to set prices, but this cant be TOO high as rival firms can compete and capture market share
• HIGH barriers to entry

Question 7

What is “profit maximization”?

Answer 7

Profit maximization refers to the level of output a firm should produce at to gain as a profit as possible

Question 8

What does revenue look like on a DIG?

Answer 8

MR = Marginal revenue
D = AR = Average Revenue (same as price!)

Question 9

What is important to remember about the MR and AR curves?

Answer 9

MR curve is TWICE as steep as the AR curve

Question 10

When it total revenue maximised?

Answer 10

When MR = 0

Question 11

What is the PED when MR > 0 ?

Answer 11

PED > 1 (so price elastic!)

Question 12

What is the PED when MR < 0 ?

Answer 12

PED < 1 (so price inelastic!)

Question 13

What are the two types of costs?

Answer 13

Average costs AC
Marginal costs MC

Question 14

How do you calculate AC?

Answer 14

AC = Total Cost / Quantity

Question 15

How do you calculate MC?

Answer 15

MC = Change in total cost / Change in quantity

Question 16

When do the AC and MC curves intersect?

Answer 16

The MC curve intersects the AC curve, at the minimum point of AC

Question 17

Why does the MC curve fall and then increase rapidly?

Answer 17

MC curve initially falls due to
- EofS
- Specialisation

MC rises sharply due to the law of diminishing marginal returns
(FOPs get in the way, less effective)

Question 18

What are the 3 types of profit in economics?

Answer 18

Abnormal profit (sometimes called supernormal profit)
–> occurs when TR > TC

Normal profit (zero profit, break-even level of output)
–> occurs when TR = TC

Loss (Negative economic profit, sometimes called subnormal profit)
–> occurs when TR < TC

Question 19

When are profits maximised?

Answer 19

Two possible approaches:

Profit is maximised at the quantity where TR is the greatest distance from TC
–> TR - TC (find quantity at which this is the largest value)

Profit is maximised when MR = MC
–> The quantity at which these two curves intersect