4.1.5 competition/ types of market

Question 1

4 main market types from LEAST to MOST competitive

Answer 1

perfect comeptition
monopolistic competition
oligopoly
monopoly

Question 2

market structure is characterised by

Answer 2

number of firms
degree of product differentiation
degree of barriers to entry

Question 3

homogoneous

Answer 3

products are all same

Question 4

when do firms breakeven

Answer 4

TR=TC

Question 5

profits increase when

Answer 5

MC<MR

Question 6

profits decrease when

Answer 6

MR<MC

Question 7

why do firms choose to profit maximise

Answer 7

increase wages
increase dividends for entrepreneurs
to finance investments

Question 8

total profits are maximised when

Answer 8

marginal profits = 0

Question 9

what is the principal-agent problem/ divorce of ownership from control

Answer 9

agent makes decisions for principle
agents acts in his own interests

eg when an owner sells shares they loose some control over the business
could lead to decreased wages for manager to increase dividends for shareholders

Question 10

OTHER objectives of the firm

Answer 10

survival (esp in times of recession)
growth- so can take advantage of EoS
quality, to build a reputation
maximise sales revnue (when MR=0)
sales maximisation, until make a loss
environmentally friendly

Question 11

what is the satisficing principle

Answer 11

earning just enough to keep shareholders happy
managers may satisfice by earning enough profits to keep shareholders happy whilst still meeting other objectives
this occurs when their is a divorce of owenership from control

Question 12

characteristics of perfect competition (8)

Answer 12

many buyers and sellers
sellers are price takers
free entry and exit of the market
perfect knowledge
homogeneous goods
short run profit maximisers
factors of production are perfectly mobile
no externalities (negative or positive)

Question 13

advantages of perfect competition (6)

Answer 13

perfect knowledge
no barriers meaning max choice for consumers
normal profits in LR so consumers aren’t exploited
max consumer welfare as P=MC
allocatively efficient as P=MC
productively efficeint as in LR MC=ATC

Question 14

disadvantages of perfect competition (3)

Answer 14

unrealistic model
normal profits prevent dynamic efficiency
economies of scale not accounted for in model

Question 15

explain how perfect competiion can ONLY make losses/profits in the SHORT RUN

Answer 15

if firms are making supernormal profit due to perfect knowledge and no barriers new firms will enter the market (supernormal profit is the incentive)
increased supply of the good which decreases prices and also decreaess D=AR=MR as firms are price takers
now AR=ATC so firms are making normal profit in LR
(same for loss but firms leave)

Question 16

in the long run in perfect competition

Answer 16

MR=AR=MC=ATC

Question 17

why are firms price takers in perfect competition

Answer 17

if decrease price, losses
increase price, lose all customers to competitors

Question 18

why do only SOME firms leave a loss making industry

Answer 18

if AR<ATC>AVC, firms can remain in the market as they can cover their variable costs and can decrease AFC by increasing sales
but if AR<AVC this is the shutdown price and it is no longer profitable to remain in the market so firms must shutdown</ATC>

Question 19

characteristics of monopolistic competition (8)

Answer 19

short run profit maximisers
product differentiation however lots of close substitutes
large number of buyers and sellers
dilluted market
compete based on non price factors
no barriers to entry or exit
some degree of price setting power
imperfect information

Question 20

example of monopolistic competition market

Answer 20

hairdressers

Question 21

monopolistic competition in short run

Answer 21

in SR firms profit maximise at MC=MR
at this point AR>ATC so supernormal profit
D is downward sloping as it has a degree of inelasticity due to non price factors

Question 22

monopolistic competition in long run

Answer 22

firms are attracted to market by supernormal profits
makes firms D more elastic which shifts it left
AR=ATC so normal profits
H/E firms can influence their elastcity using non price factors which can make them profitable

Question 23

advantages of monopolitic competition

Answer 23

firms can make profit so can reinvest, dynamic efficiency
more consumer choice
more realistic model than perfect competition

Question 24

disadvantages of monopolistic compeition

Answer 24

low profits in LR so dynamic efficiency is limited
less productively efficient as aren’t at bottom of ATC
waste leading to neg externalities