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Micro Economics > 4.1.5 Perfect Competition, Imperfect Competition and Monopoly > Flashcards

4.1.5 Perfect Competition, Imperfect Competition and Monopoly Flashcards

1
Q

What is each market characterised by?

A
  • number of firms in market
  • level of knowledge
  • barriers to entry
  • degree of product differentiation
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2
Q

Barriers to entry

A

Things which prevent potential competitors from joining an industry

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3
Q

Types of barriers to entry

A
  • sunk costs
  • capital costs
  • scale economies
  • legal barriers
  • marketing barriers
  • limit pricing
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4
Q

Barriers to exit

A

Things which prevent firms from leaving an industry

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5
Q

Types of barriers to exit

A
  • cost and time of making employees redundant
  • selling premises and stock
  • notifying customers and suppliers
  • might be in contract right another firm
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6
Q

Why do firms profit maximise?

A
  • provides greater wages and dividends for entrepreneurs
  • retained profits are a cheap source of finance
  • in the SR the interest of the shareholders is important
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7
Q

Where does profit maximising occur?

A

Where MC=MR

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8
Q

Divorce of ownership and control

A

This is where the people running the business have conflicting views on the objectives of the firm

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9
Q

Where does sales maximisation occur?

A

When AC= AR

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10
Q

Where does revenue maximisation occur?

A

Where MR=0

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11
Q

How might owners try to get managers to profit maximise

A

Give them a profit related bonus or give them shares in the business

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12
Q

Profit satisficing

A

When the managers earn just enough profit to keep the shareholders happy

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13
Q

Characteristics of perfect competition

A
  • no barriers to entry
  • homogeneous goods
  • lots of tiny firms
  • perfect knowledge
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14
Q

Advantages of perfect competition

A

+in the LR there is a lower price, so there is allocative efficiency
+there is productive efficiency
+abnormal profits in SR might increase dynamic efficiency through investment

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15
Q

Disadvantages of perfect competition

A
  • in the LR dynamic efficiency might be limited due to lack of abnormal profits
  • subdues firms are small there are no economies of scale
  • perfect competition never acc occurs
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16
Q

Explain how a firm in perfect competition receiving abnormal profits would do in the long run

A
  • in the SR the firm makes abnormal profits
  • new forms are incentivised to enter the industry
  • they enter due to lack of barriers
  • this causes supply in the industry to shift right
  • this drops price
  • firms are price takers so must take it
  • a new demand curve is created
  • profit is now normal
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17
Q

Characteristics of monopolistic competition

A
  • low barriers to entry
  • lots of small firms
  • good knowledge
  • some product differentiation
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18
Q

Explain what happens to a firm making abnormal profits in the SR in monopolistic competition

A
  • in the SR abnormal profits are made
  • firms are attracted to the market
  • they enter due to low barriers
  • this shifts the other firms demand curves inwards since they have a smaller market share
  • AR now =AC so normal profits are made
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19
Q

How might a firm in a monopolistic market try to keep abnormal profits in the long run

A

By differentiating their product and branding (non price competition)

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20
Q

Characteristics of oligopoly

A
  • high barriers to entry
  • imperfect knowledge
  • a few dominant firms
  • differentiated product with strong branding
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21
Q

Collusion

A

When firms agree to work together to set prices or restrict output

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22
Q

Overt collusion

A

Formal agreement between firms

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23
Q

Covert collusion

A

No formal agreement but collusion is implied

24
Q

Explain why the oligopoly demand curve is kinked

A

A raise in price has an elastic response in demand because other firms keep their price low.
A cut in price has inelastic response in demand because other firms follow

25
Q

Why don’t oligopolists price compete?

A

Because of the kinked demand curve, changing price causes a loss in total revenue

26
Q

Advantages of oligopoly

A
  • abnormal profits can be reinvested and make firms dynamically efficient in LR
  • firms are more likely to innovate if they can protect their ideas
  • higher profits could be a source of government taxation
  • firms can collaborate on technology
  • economies of scale could lower prices
27
Q

Monopoly characteristics

A
  • high barriers to entry
  • single firm in the market
  • only product in market
  • low levels of knowledge
28
Q

How is monopoly power gained?

A
  • barriers to entry
  • number of competitors
  • advertising
  • product differentiation
29
Q

Disadvantages of oligopoly

A
  • higher prices and inefficiency lead to misallocation of resources
  • if firms collude there is a loss of consumer welfare
  • collusion could lead to monopoly power and so less competition and less efficiency
30
Q

Disadvantages of monopoly

A
  • misallocation of resources
  • monopolies could exploit consumers by charging higher prices, the food is under consumed and there’s a market failure
  • monopolies have no incentive to innovate
  • loss of consumer surplus
  • no choice for consumers
31
Q

Advantages of monopoly

A
  • abnormal profits could be used in research and development to make the firm dynamically efficient
  • firms are more likely to innovate if they can protect their ideas
  • if there is a natural monopoly it is more efficient than having more firms
  • economies of scale
  • high profits could be a source of government revenue through taxation
32
Q

Price discrimination

A

When the monopolist sells identical goods or services to different customers for different prices, for reasons not associated with cost

33
Q

Conditions necessary for price discrimination

A
  1. Firm must have a degree of monopoly power
  2. Monopolist must be able to segment the market and prevent buying and selling between segments
  3. The different segments just have differing elasticities of demand
34
Q

1st degree price discrimination

A

When each consumer is charge a different price

35
Q

2nd degree price discrimination

A

Selling of excess capacity

36
Q

3rd degree price discrimination

A

Charging different prices for different segments

37
Q

Costs and benefits of price discrimination for consumers

A

+consumers could benefit from net welfare gain as a result of criss subsidisation
+some consumers who previously couldn’t afford the good now can

  • price discrimination usually results in loss of consumer surplus
  • it strengthens the monopoly power in firms which could result in higher prices in the LR
38
Q

Costs and benefits of price discrimination for producers

A

+producers make better use of spare capacity
+higher abnormal profits could help stimulate investment

  • if it is used as predatory pricing method the firm could face investigation
  • it might cost the firm to divide the market
39
Q

Benefits which result from competition

A
  • in LR firms are more productively and allocative you efficient
  • in SR firms might make abnormal profits which can be reinvested, increasing dynamic efficiency
  • consumers get lots of choice of high quality goods
40
Q

Examples of non price competition

A
  • improve products
  • reduce costs
  • customer service
41
Q

Characteristics of contestable markets

A
  • face actual competition
  • entrants have access to production techniques
  • no significant barriers to entry
  • low consumer loyalty
  • number of firms in market varies
42
Q

Hit and run competition

A

Firms can enter the market take abnormal profits and then leave due to the low barriers of entry

43
Q

How do firms behave in a contestable market?

A
  • they are allocatively efficient and productively efficient in LR
  • threat of new entrants means existing firms only make normal profits so they don’t attract other firms
44
Q

Vertical integration

A

When one firms gains control of more if the market and could gain control of important technology. This might prevent other firms entering the market and is a barrier to entry

45
Q

Brand proliferation

A

When firms saturate the market with their goods but disguise them so consumers don’t know the actual market concentration. (The many brands of laundry soap are provided by only a few large conglomerates)

46
Q

Static efficiency

A

Describes the efficiency at one point in time

47
Q

Dynamic efficiency

A

New technology and increases in productivity which causes efficiency to increase over a period of time

48
Q

Productive efficiency

A

When firms minimise their average total costs (when AC=MC)

49
Q

Allocative efficiency

A

When resources are distributed to the goods and services that consumers want. This maximises utility. (When P=MC)

50
Q

X inefficient

A

When firms have average costs over the level they should (monopolies tend to be x inefficient)

51
Q

Where is consumer surplus on a diagram

A

Above the market price and below the demand curve

52
Q

What does an outward shift to demand do to consumer surplus

A

Increase it

53
Q

What does an inward shift in supply do to consumer surplus

A

Decrease it

54
Q

Where is producer surplus on a diagram

A

The area below market price and a over the supply curve

55
Q

What does an outward shift in supply do to producer surplus

A

Increase it

56
Q

What does an outward shift in demand do to producer surplus

A

Increase it

57
Q

Economic welfare

A

Producer surplus + consumer surplus

Micro Economics (6 decks)

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