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AQA A Level Economics > 4.1.5 Perfect competition, imperfectly competitive markets and monopoly > Flashcards

4.1.5 Perfect competition, imperfectly competitive markets and monopoly Flashcards

1
Q

What do we assume is the main objective of firms?

A

Profit maximising

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2
Q

At what quantity is profit maximised?

A

MC=MR

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3
Q

How is SNP calculated on a monopoly diagram?

A
  • TR - TC
  • (Q profit maximisation * P where Q=AR) - (Q pm * P Q=AC)
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4
Q

What other objectives might firms have?

A

Revenue maximising or sales maximising

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5
Q

At what quantity is revenue maximised?

A

MR=0

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6
Q

At what quantity are sales maximised?

A

AC=AR (normal profit made)

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7
Q

What is the satisficing principle?

A

When firms may accept lower profit to satisfy a broader range of objectives, often considering all stakeholders

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8
Q

What is the principle agent problem?

A
  • Can managers be trusted to work in favour of corporate objectives that are generally seen through the perspective of the shareholders
  • Possibly resolved by bonuses or giving staff shares of business
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9
Q

How many firms/buyers are in perfect competition?

A

Very many

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10
Q

What is the level of barriers to entry/exit in perfect competition?

A

No barriers

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11
Q

What type of product is in perfect competition?

A

Homogenous (interchangeable)

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12
Q

How is information distributed in perfect competition?

A

There is perfect information between buyers and sellers

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13
Q

What profit do firms in perfect competition gain in the short and long run?

A
  • Possible supernormal profit in the short run
  • Normal profit in the long run
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14
Q

Are firms price makers or takers in perfect competition?

A

Takers

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15
Q

In what ways are firms in perfect competition efficient?

A
  • Allocatively efficient
  • Productively efficient
  • X-efficient
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16
Q

What is the elasticity of the D/AR curve in perfect competition?

A

Perfectly elastic

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17
Q

How many firms are in monopolistic competition?

A

Many

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18
Q

What is the level of barriers to entry/exit in monopolistic competition?

A

Low barriers

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19
Q

What type of product is in monopolistic competition?

A

Differentiated products, through limited advertising, customer service and relations, or different products.

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20
Q

How is information distributed in monopolistic competition?

A

Equal information between buyers and sellers

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21
Q

What profit do firms in monopolistic competition gain in the short and long run?

A
  • Possible supernormal profit in the short run
  • Normal profit in the long run
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22
Q

Are firms price makers or takers in monopolistic competition?

A

Takers

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23
Q

In what ways are firms in monopolistic competition efficient?

A

X-efficient

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24
Q

What is the elasticity of the D/AR curve in monopolistic competition?

A

Elastic

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25
Q

How many firms are in an oligopoly?

A

Several or a few

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26
Q

What is the level of barriers to entry/exit in an oligopoly?

A

High barriers

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27
Q

What type of product is in an oligopoly?

A

Homogenous or differentiated

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28
Q

How is information distributed in an oligopoly?

A

Information is asymmetric, as firms have more than consumers.

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29
Q

What profit do firms gain in an oligopoly?

A

Possible supernormal profit

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30
Q

Are firms price makers or takers in an oligopoly?

A

Takers, but can be makers in the long run due to high barriers to entry and exit

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31
Q

In what ways are firms in an oligopoly efficient?

A

Dynamically efficient

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32
Q

What is the elasticity of the D/AR curve in an oligopoly?

A

Kinked demand curve:
- Elastic at Q < equilibrium
- Inelastic at Q > equilibrium

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33
Q

How many firms are in a monopoly?

A

One

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34
Q

What is the level of barriers to entry/exit in a monopoly?

A

Very high, essentially insurmountable

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35
Q

What type of product is in a monopoly?

A

Unique

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36
Q

How is information distributed in a monopoly?

A

Asymmetric, as firms have more

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37
Q

What profit does a monopoly gain?

A

Supernormal profit

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38
Q

Are firms price makers or takers in a monopoly?

A

Makers

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39
Q

In what ways are firms in a monopoly efficient?

A

Dynamically efficient

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40
Q

What is the elasticity of the D/AR curve in a monopoly?

A

Elastic at Q < equilibrium
Inelastic at Q > equilibrium

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41
Q

What are examples of perfectly competitive markets?

A

Fruit sellers or the stock market.

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42
Q

What are examples of monopolistically competitive markets?

A

Hairdressers, restaurants, takeaways

43
Q

What are examples of oligopolies?

A

Supermarkets, Google, Apple, Samsung, car companies, airline companies

44
Q

What are examples of monopolies?

A

Severn Trent, National Grid

45
Q

How will perfectly competitive firms making supernormal profit in the short run always make normal profit in the long run?

A
  1. Firms produce at Q where MC=MR to maximise profit
  2. Firm makes supernormal profit
  3. Price acts as a single for other firms to join industry
  4. As firms join, supply shifts right
  5. Price decreases until all SNP has been competed away
46
Q

How do firms in perfect competition making a loss in the short run reach market equilibrium in the long run?

A
  1. At MC > MR firm makes a loss
  2. Firms leave market until there is no loss (supply shifts left)
  3. Market and firm reach normal profit in the long run
  4. Leading to long run equilibrium where MC=AC=AR, and S=D
47
Q

What about perfect competition benefits society?

A
  • Firms are productively efficient
  • Firms are allocatively efficient
  • Firms are X-efficient, resulting in no waste
48
Q

What are the costs of perfect competition to society?

A
  • Not dynamically efficient, as there is no supernormal profit available in the long run to innovate or improve production
  • Less variety and choice of goods and services
49
Q

How do firms in monopolistic competition make normal profit in the long run?

A
  1. In the short run, supernormal profit can be gained
  2. Price acts as a signal for firms to join industry
  3. Supply increases, price decreases
  4. AR and MR for firms both decrease
  5. So in the long run firms make normal profit
50
Q

What are the benefits of monopolistic competition for society?

A
  • More variety for customers, and a better choice of goods and services
  • Goods and services of a high quality
  • X-efficiency, resulting in limited waste of scarce resource
51
Q

What are the costs of monopolistic competition to society?

A
  • Quantity produced is below productive efficiency
  • Quantity produced is below allocatively efficiency
  • Lack of supernormal profit for investment and innovation, so there is no dynamic efficiency
52
Q

What is the main characteristic of an oligopoly that makes it different to other market structures?

A

There is interdependence between firms, meaning they must consider the actions of other firms when making decisions

53
Q

What are the 2 different characterisations of oligopolies?

A
  • Competitive
  • Collusive
54
Q

What is a competitive oligopoly?

A
  • An oligopoly where the firms produce differentiated products
  • There is research and development to drive innovation, branding and advertising, and different target markets
55
Q

What is a collusive oligopoly?

A

An oligopoly where the firms work together to act as a monopoly by agreeing to restrict output as a cartel so they make supernormal profit at the expense of consumer welfare.

56
Q

What does the kinked demand curve explain?

A

Price stability, so firms must differentiate products

57
Q

What are the benefits of oligopolies for society?

A
  • There is product differentiation - some variety, higher quality, better technology
  • Supernormal profit can be invested (into above), meaning there is dynamic efficiency
58
Q

What are the negatives of oligopolies for society?

A
  • Not allocatively efficient - underproducing
  • Not productively efficient - P > MC=AC
  • Not price competitive - not at lowest cost
  • X-inefficient - wasteful
59
Q

What is deadweight loss?

A

The loss of economic efficiency when the equilibrium price and quantity is not achieved, such as higher prices due to monopoly power, which could lead to a net deadweight loss to society.

60
Q

What are the barriers to entry in a monopoly?

A

Expensive capital cost - e.g. utilities need infrastructure/capital
MES may be very high - big economies of scale
Branding/advertising
Patent/copyright
Ownership of supply chain
Levels of technology
Geographical situation - e.g. next to customers or FoP e.g. raw material

61
Q

What are the barriers to exit in a monopoly?

A

Sunk costs
Contractional obligations

62
Q

What are the benefits of monopolies for society?

A

Profit can be invested into local infrastructure or research and development for innovation/invention
Economies of scale - efficiency and making best use of limited resource - decreased AC
Dynamic efficiency - they have funding to keep ahead of competition in product and production (may be barrier to entry)
National level monopolies can compete with other big companies and provide jobs/ tax revenue
Cross subsidisation - they can use profit from one part of the business to support non-profitable parts of the business, extending service

63
Q

What are the negatives of monopolies for society?

A

Typically not productively efficient
Quantity produced is less than allocative efficiency
X-inefficient - SNP is assured so they may not operate at lowest AC
Less choice/variety for consumers
Possible diseconomies of scale
May abuse excessive market/political power
Higher price is bad for consumer

64
Q

What are the evaluation points for monopolies?

A

Nature of industry i.e. if it is a natural monopoly
If there is any government control - regulation, price gaps
Corporate objectives - are they profit maximised or satisficing
Is it a necessity or luxury - necessities need more control
Level of research and development and technology improvement
If they export
Is it nationalised - if so it should help society
Who owns the monopoly - motives if foreign owned

65
Q

What is allocative efficiency?

A

When resources are distributed to the goods and services that consumers want, therefore where S=D, and P=MC, maximising utility, meaning consumers pay for the value of the marginal utility they derive from consuming the good or service.

66
Q

What is productive efficiency?

A

When a firm minimises their average total costs, where MC = AC

67
Q

What is dynamic efficiency?

A

Where supernormal profit is invested into human and non-human capital, research and development, and technological change, which can lead to lower costs of production in the future, or the creation of new products.

68
Q

What is X-inefficiency?

A

When a firm is producing within the AC boundary, so costs are higher than they would be with competition in the market.

69
Q

What is price discrimination?

A

When a firm charges different customers different prices for the same product

70
Q

What is the purpose of price discrimination?

A

To take as much of the consumer surplus as possible

71
Q

What are the 3 conditions needed for a firm to price discriminate profitably?

A
  1. Seller must have monopoly power
  2. Resale by customers must not be possible
  3. The market must be separable into customer groups with different PEDs
72
Q

What is an example of 3rd degree price discrimination?

A

Train tickets are separated into child and adult tickets, with child tickets being more elastic and adult tickets being more inelastic, as adults may need train tickets at short notice due to business meetings etc.

73
Q

What are the benefits of price discrimination?

A

Cheaper prices may be available for those with less money
Cross-subsidising is possible, making the product more accessible

74
Q

What is contestability?

A

The extent to which firms are believed to be able to enter a market making incumbent firms reduce price as a deterrent to entrants

75
Q

What is market structure decided by?

A

Barriers to entry and exit

76
Q

What are examples of barriers to entry?

A
  • High startup costs (expensive infrastructure/capital)
  • R+D cost
  • Level of technology needed
  • Level of information
  • Patents/copyright/IPR/license
  • Resource/supply chain ownership
  • Brand name/image
  • Access to market
  • Economies of scale (MES for natural monopolies)
77
Q

What are examples of barriers to exit?

A
  • Sunk costs
  • Contractual obligations to workers/suppliers/customers/government
78
Q

What are sunk costs?

A

Money that has already been spent and cannot be recovered

79
Q

Why is perception of barriers important in determining contestability?

A

It makes firms try to prevent other firms from entering a market/industry (rent-seeking behaviour)

80
Q

What are the 2 methods firms can use to prevent other firms from joining their industry?

A
  1. Increasing barriers to entry - eg buy potential competitors
  2. Produce at Q > MR=MC to lower profit - firms will increase Q to Q where AC=AR (sales maximising), removing SNP, deterring entry as it stops a high price acting as a signal for firms to join industry, preventing ‘hit and run’ entry to industry
81
Q

What is hit and run competition?

A

When firms enter and exit a market quickly, selling their product for a short period of time and then leaving, making SNP in the SR

82
Q

What is the impact of contestability on policy making?

A

There is less need for strict regulation if a market is contestable, so there is no need for: restricting mergers, worrying about licensing, breaking up big corporations, controlling prices

83
Q

What are the short run benefits which are likely to result from competition?

A

Firms may get super normal profit in the short run, so dynamic efficiency is possible

84
Q

What are the long run benefits which are likely to result from competition?

A

Production at lowest price at productive efficiency (MC=AC) (lowest ATC)
Production of quantity at allocative efficiency (MC=AR) which balances limited resource and unlimited wants, solving the economic problem
X-efficiency - no waste of resource

85
Q

Why may firms compete in non-price competition or have product differentiation?

A

To improve products, reduce costs and improve the quality of the service provided

86
Q

What are examples of product differentiation?

A

Branding, promotion, customer and after sales service, improved technology, better design, high quality packaging, exclusivity, loyalty schemes, online marketing, increased product availability

87
Q

What are examples of anti-competitive behaviour?

A

Buying up the supply chain, increasing barriers to entry, mergers and takeovers (buying competitors)

88
Q

What is the process of creative destruction also known as?

A

Rent-seeking behaviour

89
Q

What is the process of creative destruction?

A

As new ideas occur, old industries and technology becomes obsolete and firms/workers in the industry lose out or become structurally unemployed and new production and products become dominant

90
Q

What is economic welfare?

A

The total benefit society receives from an economic transaction
The total areas of the consumer and producer surplus

91
Q

What is static efficiency?

A

Describes the level of efficiency at one point in time, such as productive and allocative efficiency.

92
Q

What is the difference between static and dynamic efficiency?

A
  • Static efficiency describes the level of efficiency at one point in time, such as productive and allocative efficiency
  • Dynamic efficiency is concerned with new technology and increases in productivity, causing efficiency to increase over a period of time
93
Q

What makes a market dynamically efficient?

A
  • If all resources are allocated efficiently over time, and the rate of innovation is at the optimum level, leading to falling long run average costs
  • If consumers needs and wants are met as time goes on
94
Q

What is dynamic efficiency affected by?

A

Short run factors such as demand, interest rates and past profitability.

95
Q

What might be needed to cause long run costs to fall to be dynamically efficient?

A

Short run costs might be increased.

96
Q

How can dynamic efficiency be evaluated?

A
  • There is a long time lag between making an investment and having falling average costs, considering how factors change in the long run
  • Some firms will face a trade-off between giving their shareholders dividends and making an investment
97
Q

How does X-inefficiency occur?

A

Possibly due to organisational slack, a waste in the production process, poor management, or laziness.

98
Q

Why do firms with monopoly power tend to be X-inefficient?

A

They have little incentive to lower their average costs because of the lack of competition they face.

99
Q

When are consumer and producer surplus both maximised?

A

At the free market equilibrium.

100
Q

Why does an inelastic demand give a larger consumer surplus?

A

Consumers are willing to pay a much higher price to consume the good.

101
Q

How does consumer surplus increase?

A

From an increase in demand.

102
Q

How does consumer surplus decrease?

A

A decrease in supply.

103
Q

How does producer surplus increase?

A

An increase in supply or demand.

AQA A Level Economics (21 decks)

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