4.1.5 Market Structure ( Only .1 .2 .3 .6 .8 .10) Flashcards
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What is on the spectra of competition?
PERFECT COMPETITION
IMPERFECT COMPETITION (monopolistic competition, duopoly, oligopoly)
MONOPOLY
What is a monopoly?
1 firm producing 100% of market output
What is oligopoly?
A few independent firms needing to take account of its rivals’ reactions when deciding its own marketing statergies
What is perfect competition?
Large number of buyers and seller
No entry or exit barriers in the long run
What does traditional economic theory assume about owners and entrepreneurs who run firms?
Their one business objective is to produce the level of output at which profit is maximised
What is the profit maximizing rule?
marginal cost = marginal revenue
MC = MR
When do profits rise when output increases?
If MR > MC
What is divorce of ownership from control?
The owners and those who control the firm having different objectives
What is the consequence of a divorce of ownership from control?
The principal agent problem
Shareholder having a different objective to managers
What is the objective for shareholders?
Profit maximization
What are examples of Monopolies?
Royal Mail
London red buses
What are examples of oligopoly?
- Pepsi and Coke
- Samsung and Apple
What are examples of perfect competition?
Gas
Currency
Crypto
Why is profit maximization the most important objectives for most firms?
- Dividends for shareholders
- rewards for entreneurship
- Lower prices for consumers
- Can re-invest rather than taking out loans
What are other possible objectives for firms?
Profit satisficing
Sales maximization
Revenue maximization
Survival
Corporate Social Responsibility
What is satisficing?
Achieving a satisfactory outcome rather than the best possible outcome
What are the disadvantages of monopoly?
- Allocative inefficiency leading to higher prices for consumers
- Productive inefficient (voluntarily)
- Creates inequalities
What are the advantages of monopoly?
T
What is static efficiency?
Efficiency at a particular point in time (productive and allocative)
What is dynamic efficiency?
Occurs in the long run
Efficiency leading to the development of new products and more efficient processes that improve efficiency
What conditions are required for productive efficiency?
Average cost has to be minimized
What conditions are required for allocative efficiency?
Price = MR
What type of efficiency are productive and allocative efficienc?
Static efficiency
What is dynamic efficiency influenced by?
Reasearch and development
Investment in human and non-human capital
Technological change
What are the possible advantages of monopolies?
- They earn huge abnormal profits which can be invested in research and development -> more creativity and innovation -> consumers get a wider range of better quality products -> increases international competitiveness
- Lower cost per unit -> so competitive prices for consumers -> economy of scale
What is monopoly power influenced by?
- Huge barriers to entry
- number of competitors
- degree of product differentiation
- advertising
What are price takers?
Firms operating in perfectly competitive markets which cannot influence the market price
And therefore have to maximize profits using output
How does perfect competition lead to efficient allocation for resources?
Because perfect competition is characterized by dynamic and static efficiency
How would large numbers of producers affect firm and industry behavior?
• Behavior of Firms: Each firm in the industry is a price taker, meaning it cannot influence the market price. Firms focus on maximizing profits by adjusting their output levels.
• Industry Behavior: High competition keeps prices in check, preventing any single firm from dominating the market. Profit margins tend to be slim due to competition.
How would identical products affect firm and industry behavior?
Behavior of Firms: Firms produce homogeneous products, making price the key differentiator. Advertising and product differentiation play a minimal role.
• Industry Behavior: Consumers perceive products as perfect substitutes, leading to a focus on price competition. This enhances allocative efficiency as resources are directed to where they are most valued.
How would perfect knowledge affect firm and industry behavior?
Behavior of Firms: Firms and consumers possess complete information about prices, costs, and product quality. This enables rational decision-making.
• Industry Behavior: Efficient outcomes are achieved as both buyers and sellers have perfect information. Prices reflect true costs, leading to allocative efficiency
What are the short-run benefits of competition?
- Lower prices for consumers
- Innovation to differentiate products
- Efficient resource allocation
What are the long-run benefits of competition?
- Lower cost of production due to research having to be done
- Dynamic efficiency
What is creative destruction?
new innovations and technologies replace established methods, products and firms
what are examples of creative destruction?
Firm exit
Resource reallocation
What other basis’ do firms compete for - other than price?
Quality
Reduced costs
