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BEC I and II > 4. Market Structure and Firm Strategy > Flashcards

4. Market Structure and Firm Strategy Flashcards

1
Q

What is market definition?

A

a market is any facility (e.g., physical location, virtual system, etc.) that enables sellers (supply) and buyers (demand) to interact for the exchange of specific goods or services.

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2
Q

What are 4 major market structures?

A

Perfect competition.
Perfect monopoly.
Monopolistic competition.
Oligopoly.

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3
Q

What are 2 profit concepts?

A
  1. Normal profit: just the amount of profit necessary to cover operating costs and compensate owners for their capital investment and/or managerial skills.
  2. Economic profit: any amount greater than that of normal profit.
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4
Q

What is economic profit also called?

A

Accounting profit.

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5
Q

What is a central element in determining the nature of market structure?

A

The extent of competition in the market.

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6
Q

Perfect competition: what are 6 characteristics?

A
  1. Large number of independent buyers and sellers, each too small to affect price.
  2. Homogeneous products/service.
  3. Firms can enter/leave market easily.
  4. Resources are completely mobile.
  5. Buyers/sellers have perfect info.
  6. Government does not set the price.
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7
Q

Perfect competition: what does demand curve looks like on a graph?

A

Constant (horizontal).

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8
Q

Perfect competition: what is demand curve equal to?

A

Marginal revenue (revenue derived from the last item.

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9
Q

Perfect competition: when is the profit maximized? How much does it cost to produce the qty?

A

PMAX=MR=MC (where the point meets).

Where it meets ATC (QxATC=TC).

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10
Q

Perfect competition: where is the area of profit?

A

Between the price of max profit and price of total cost.

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11
Q

Perfect competition: what is short-run result depend on? What are 4 cases?

A

Firm’s ATC/AVC vs market price.

  • If market price > ATC = Short-run profit
  • Market price = ATC = breakeven in short-run
  • market price < ATC, but >AVC = short-run losses, but covering FC.
  • market price < ATC and < AVC = firm shuts down
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12
Q

Perfect competition: what does long-run graph look like? Why is it?

A

MR=D - horizontal.
MC is half U shape and MR=MC=LAC (where MR meets MC is the lowest point of LAC (long-run average cost) because in the perfect competition, firms will adjust that no-one can make profit (all firms exactly break-even).

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13
Q

Perfect monopoly: What are characteristics?

A

*Single seller
*Good or service for which there are no close substitute
*Market entry is restricted
Single firm = Market

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14
Q

Perfect monopoly: What are 2 basic reasons monopolies exist and example? What are they called?

A
  • Economies of scale: A single producer can produce at a lower cost than multiple producers (ex: public utilities) - Natural monopolies.
  • Legal authority or control: A single producer has sole legal authority or sole control of resource (Ex: holding patent).
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15
Q

Perfect monopoly: what does short-run graph look like?

A

Demand=downward straight line to the right.

MR=starting the same as D, but downward straight line toward the right on the left side of D line (below the D curve).

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16
Q

Perfect monopoly: when is the profit maximized on short-run? How is the cost determined?

A

Where MR meets MC.

Where the above line meets demand curve.

17
Q

Perfect monopoly: what does short-run result depend on? What are 3 cases?

A

Firm’s ATC vs market price.

  • ATC < market price = profit
  • ATC = market price = breakeven
  • ATC > market price = loss
18
Q

Perfect monopoly: does it assume firm will make profit?

A

No.

19
Q

Perfect monopoly: long-run: where on a graph monopolistic firm produce?

A

MR=MC

20
Q

Perfect monopoly: long-run: how can a firm make a profit and increase?

A

By reducing marginal and average cost by changing plant size.
Increase demand by advertising and promotions.

21
Q

Perfect monopoly: long-run: compared to perfect competition, what does monopolistic firm result in?

A

Higher price and inefficient use of resource (because there is excess profit because of price at optimum output > MC).

22
Q

Monopolistic competition: characteristics?

A
  1. A large number of sellers.
  2. Firms sell a differentiated product or service (similar but not identical).
  3. Firms can easily enter/exist market
  4. Product sold has close substitute.
23
Q

Monopolistic competition: what does a graph look like?

A

Same as perfect monopoly (MR curve is sharper slope).

24
Q

Monopolistic competition: where does it maximize profit?

A

MR=MC.

25
Q

Monopolistic competition: what does short-run result depend on? What are 3 cases?

A

Firm’s ATC vs market price.

  • ATC < market price = profit
  • ATC = market price = breakeven
  • ATC > market price = loss
26
Q

Monopolistic competition: what happens when firms are making profits? Losing?

A

More firms will enter the market and there will be less demand for each firm.
Firms will leave the market and there will be more demand.

27
Q

Monopolistic competition: long-run: what happens to equilibrium?

A

It will reach it and all firms break even and no long-run excess profit.

28
Q

Monopolistic competition: long-run: what is the state of resource allocation compared to perfect competition?

A

Misallocated because P>MC.

29
Q

Oligopoly: Characteristics?

A
  • Few sellers
  • Firms sell either homogeneous or differentiated items
  • Market entry is restricted
30
Q

Oligopoly: what is the relationship between sellers and how do they impact each other?

A

Interdependent.

Actions of each seller affect others.

31
Q

Oligopoly: what does the graph look like?

A

MC = half U shape.
Demand curve = downward slope with “kink” (market price) in the middle.
MR=downward slope below demand curve till it hits the qty line below kink. Then it goes down on the qty line and comes out as downward straight slope to the right.

32
Q

Oligopoly: what is assumed about demand above kink (market price)? Below kink? Why does it happen?

A

Above: More elastic demand.
Below: Less elastic demand.
Below market price, no one tries to raise price because they may lose market share, but above kink, firms may reduce price to meet competition.

33
Q

Oligopoly: where is the firm most profitable? What is the price?

A

Where MC=MR.

Where kink=demand on Y-axis.

34
Q

Oligopoly: Short-run analysis: Does firm make profit?

A

Depends on ATC vs Market price.

  • ATC < market price = profit
  • ATC = market price = breakeven
  • ATC > market price = loss
35
Q

Oligopoly: Long-run analysis: Doe firm make profit?

A

If the firm makes profit in a shot-run, it will continue to make profit because market entry is restricted.

36
Q

Oligopoly: what is the relationship between price and MC? What does it result in?

A

Price > MC resulting in misallocation of resources.

37
Q

Oligopoly: what is the price tendency?

A

Tend not to change due to having a few sellers, resulting in “price war”

38
Q

Oligopoly: how do firms tend to compete with each other?

A

On other factors than price.

Advertising, promotion, packaging, service.

39
Q

Oligopoly: what is overt collusion? What is tacit collusion? Is it legal in US?

A

Overt (cartel): Conspiring to set outputs, prices or profits among firms = Illegal.
Tacit: Firms following prices set by market leader = Not illegal.

BEC I and II (12 decks)

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