4.1.5 Perfect competition, imperfectly competitive markets and monopoly Flashcards
What are the two opposite ends of the competition spectrum
Perfect competition to pure monopoly
What factors distinguish market structures
Number of firms, degree of product differntiation, and ease of entry
What is the primary objective of firms
Profit maximisation
What is the satisficing principle
Firms aim for satisfactory outcomes rather than optimal ones
How does the divorce of ownership from control affect firms
May lead to different objectives, conduct, and performance
What are the characteristics of perfect competition
Many firms, identical products, free entry/exit, and perfect knowledge.
Are firms in perfect competition price takers or price makers?
Price takers
What is the outcome of perfect competition in terms of efficiency
Efficient allocation of resources
What are the main characteristics of monopolistic competition
Many firms, differentitated products and free entry/exit.
What type of competition is common in monopolistic markets
Non-price competition (e.g advertising and branding)
What are the main characteristics of oligopoly
Few firms, high barriers to entry, and interdependence.
What is kinked demand curve model
It illustrates price rigidity due to interdependence among firms
What is the difference between collusive and non-collusive oligopoly
Collusive oligopoly involves cooperation, while non-collusive involves independent decision-making
What factors influence monopoly power
Barriers to entry, number of competitors, advertising and product differentiation
Advantages of monopoly
Eos, potential for innovation
Disadvantages of monopolies
Higher prices, inefficiency and reduced consumer choice
What conditions are nessecary for price discrimination
Market power, ability to segment markets and prevent resale
What are the advantages of price discrimination
Increased profits for firms and potential for more output
What are the disadvantages of price discrimination
Consumer exploitation and potential inefficiency
What is creative destruction
The process where innovation by new firms disrupts existing markets
How do firms compete beyond price
By improving products, reducing costs and enhancing service quality.
What is a contestable market
A market with low barriers to entry and exit, allowing “hit-and-run” competition
What are sunk costs
Costs that cannot be recovered if a firm exits the market
What is the difference between static and dynamic efficiency
Static efficiency focuses on curent resource allocation, while dynamic effiency involves innovation and long-term growth
What is productive effieciency
Minimizing average total costs
Where is allocative efficiency (on the graph)
Price equals marginal cost (P=MC)
What is consumer surplus
The difference between what consumers are willing to pay and what they actually pay
What is producer surplus
The difference between the price recieved by producers and the minimum price they are willing to accept
How does monopoly affect surplus
It creates deadweight loss, reducing total surplus
