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Mircroeconomics - 4.1 Individuals , Firms , Markets and Market Failure > 4.1.5 Perfect Competition , imperfectly competitive markets and monopoly > Flashcards

4.1.5 Perfect Competition , imperfectly competitive markets and monopoly Flashcards

1
Q

Define perfect competition

A

Is a market structure with a large number of buyers and sellers who have perfect information in the market

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2
Q

What are the assumptions about perfect competition

A

Homogenous products (all the same products + perfect substitutes)
All firms have access to factors of production
Large number of buyers and sellers
Free entry into the market (no barriers of entry)
Perfectly elastic demand curve (firms are price takers)
Perfect knowledge (for buyers and sellers)
Profit maximisation

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3
Q

Describe a perfectly competitive market graph in the short term

A

Supply and demand causes a price determination
This price is sold at, no higher or lower as the firms are price takers
The demand is constant meaning it is the marginal revenue and average revenue curve
The AC curve is below
Where the MC curve cuts the MR curve is the profit maximisation, before it cuts profit is made and after profit is lost
The point below the MR curve and cut at AC curve is the area of supernormal profit

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4
Q

Define profit maximisation

Explain it on a graph

A

Is a output where marginal cost = marginal revenue
This is because it is the furthest distance between Total revenue and Total Costs
Any point where the Marginal revenue is greater than the marginal cost is marginal profit
After MC = MR a loss of profit occurs as MC is greater than MR

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5
Q

Define marginal profit

A

Is the addition to a firms profit from producing an additional unit of output

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6
Q

Explain perfectly competitive market graphs in the long run

A

As a business is making a supernormal profit other firms enter the market as there are no barriers to entry
As more firms supply there becomes an increase
This decreases the overall price
The price is on the minimum level of average costs
The point where MC cuts through the MR a normal profit is being made . This is where enough revenue per unit is made to cover the cost per unit

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7
Q

Define a price taker

What market does it occur in

A

A firm that is unable to influence the market price and therefore accepts it

Found in a perfectly competitive market where products are exact substitutes

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8
Q

Describe the role of productive efficiency in perfectly competitive markets

A

Is producing for the minimum possible average costs with no waste in production
It is the point on the graph where marginal cost cuts the average cost

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9
Q

Describe the role of allocative efficiency in perfectly competitive markets

A

Measures the goods which best meet the needs and wants of society
Seen when consumer and producer surplus are at its highest, maximum total welfare in the market

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10
Q

Describe the role of static efficiency in a perfectly competitive market

A

Is the efficiency measured at a point in time, comprising productive efficiency and allocative efficiency

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11
Q

What is a subnormal profit

A

Is where a firm is making a profit below normal profit. The firm are making an economic loss and look to exit the market.

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12
Q

What is the role of profit in a market society

A

Return for entrepreneurship
An indicator of efficiency
Rising profits send signals to other producers in the market
Used for improvements in research and development

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13
Q

What is dynamic efficiency

A

Is the changes in choice available in a market as well as changes in quality of products

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14
Q

What were Joseph Schumpter’s thoughts on dynamic efficiency

A

He believed profits were important in a perfectly competitive market to be able to have dynamic efficiency and therefore stay competitive. Profits were used for research and development.

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15
Q

Why is it difficult to have dynamic efficiency in a perfectly competitive market

A

As there is perfect knowledge meaning innovation will be copied quickly

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16
Q

What are advantages of perfectly competitive markets

A

There is no asymmetric information
No advertising costs as there is perfect knowledge
Maximum consumer surplus
Allocative and productive efficiency

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17
Q

What is the disadvantage of a perfectly competitive market

A

They are not realistic and do not take place

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18
Q

What is monopoly power

A

Is the power of a firm in a market to act as a price maker

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19
Q

What is a pure monopolist

A

Is a single supplier that dominates the entire market (100% market share)

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20
Q

What is a working monopoly

A

Is a firm with a market share of 25% or over

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21
Q

What are ways of achieving monopoly power

A

Merger and takeover : two firms become one, less choice for customer allowing the firm to raise the price
Statutory monopoly : when a firm is given monopoly status by the government (water companies).
Internal expansion : firm grows and generates more sales
Branding : a firm achieves high brand loyalty
Cost barriers : firm achieves economies of scale and lower average costs

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22
Q

What are assumptions of monopoly markets

A

Firms are price makers (downwards sloping demand curve)
High barriers to entry and exit
Small number of firms in the market

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23
Q

How does a monopoly graph look

A

Has a AR and MR curve.
Average cost curve cuts through AR curve
Where MC curve cuts through MR curve is the profit maximising level of output
The price at this level of output is the demand curve vertically up from MR curve
Firm makes a supernormal profit

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24
Q

What is the efficiency of a firm in a monopoly

A

Monopoly markets are not productively efficient or allocatively efficient
Firms can be dynamically efficient as they make supernormal profits so can invest in research and development if they want to.

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25
Q

What is X- Inefficiency

A

Where monopolies may allow average costs to be higher than they could be , because they face no pressure from competitors

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26
Q

What are the advantages of a monopoly

A

Economies of scale : produce for lowest possible average costs

Innovation : make supernormal profits so can invest in research and development

Making a supernormal proft

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27
Q

What are the disadvantages of being a monopoly

A

Productive and allocative inefficiency

X- Inefficiency

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28
Q

What are the types of barrier to entry/exit

A

Natural barriers : geographical factors which make a product hard to replicate
Economies of scale : firms have lower AC and can lower prices to deter competitors
Legal barriers : Includes Patents and Trademarks which means a product cannot be copied
Product differentiation : firm builds up a strong brand loyalty and marketing profile , making it hard for new competitors to attract customers
Sunk costs : costs that cannot be recovered if a firm has to exit the market, deterring new firms

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29
Q

What is the differences in economies of scale between a perfectly competitive market and a monopoly

A

Monopolies can fully exploit economies to scale and have increasing returns to scale, due to having less competitors

A firm in a perfectly competitive market have a lower economies of scale and a higher average costs, due to a high number of competitors with perfect knowledge

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30
Q

What is a natural monopoly

A

Is a market where a single firm with large scales of production allows them to benefit from continuous economies to scale and decreasing average costs

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31
Q

What type of businesses are natural monopolies

A

Businesses to do with infrastructure , electric and gas firms

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32
Q

What does a natural monopolies graph look like

A

Marginal and average revenue
Decreasing LRMC due to economies of scale
Decreasing LRAC above LRMC curve
Profit maximisation is the point where MR curve and MC curve meet , price point is vertical where the AR curve is

33
Q

Explain a Monopolies costs and why

A

Have extremely high fixed costs due to cost of infrastructure
Have low variable costs due to exploiting economies of scale

34
Q

Why may a natural monopoly be good for a market

A

Means less duplication of infrastructure

Less pipes and cables

35
Q

Why may a natural monopoly become regulated

What is the effect on the firm

A

To make sure the firm provides the allocatively efficient level of output for essential services

Means a firm makes subnormal profit as the AC is higher than the AR

36
Q

What is corporate social responsibility

A

Involves firms acting in a sustainable way whilst trying to make a supernormal profit

37
Q

What is monopolistic competition

A

Is a low concentration market structure with many competing firms each supplying a slightly differentiated product

38
Q

What are assumptions of monopolistic competition

A

There are many producers and consumers
Non-price competition is strong
Firms are price makers (higher elasticities of demand than a monopoly)
Low barriers to entry and exit

39
Q

Explain a monopolistic competition graph in the short run

A

Less steep MR and AR curves than a monopoly
The point where MR = MC is the price and quantity the firm sell at
Firms in monopolistic competition make supernormal due to first mover advantage

40
Q

What happens with monopolistic competition in the long run

A

A existing firm is making supernormal profits
This acts as a signal for new firms to enter the market
Demand for the existing good decreases and a firm makes normal
profit

41
Q

Explain a monopolistic competition graph in the long run

A

Supernormal profit acts as a signal to attract new producers
The demand decreases reducing the MR and AR curves
The point where AC= AR is the point of normal profit

42
Q

What is the efficiency of a firm in monopolistic competition

A

Is not allocatively or productively efficient

Is dynamically efficient due to extensive consumer choice and innovation

43
Q

What ate the similarities between Monopoly and monopolistic competition firm

A

Both firms have price making power

Both make supernormal profit in the long run

44
Q

What are the differences between a monopoly and monopolistic competition firms

A

A monopoly makes supernormal profit in the long run , monopolistic competition makes normal profit.

High barrier to entry in a monopoly, low/no barriers to entry in monopolistic competition

45
Q

Define Oligopoly

A

A market structure dominated by a small number of powerful firms

46
Q

What are the characteristics of an oligopoly

A 
Few firms in the market 
High barriers to entry / exit in the long run 
Firms are price makers 
Firms are interdependent 
Collusion in the market
47
Q

What are examples of oligopolies

A

Petrol (BP, Shell, Texaco)

Newspapers (The Sun, Daily mail)

48
Q

What is the concentration ratio

A

Measurement of how concentrated a market is - the total market share held by the largest firms in the market

Can be a ratio or a percentage

49
Q 
What is the 5 firm concentration ratio for the cinema market when : 
Market share:
Odeon = 17.14%  
Vue= 11.4% 
Empire = 3.4%
Cineworld = 22.85%
Curzon= 7.14%
A

5 firm concentration ratio = 62.2%

50
Q

How can you see if a firm is in an oligopoly

A

If the concentration ratio is over 60% the market is an oligopoly

The behaviour of a firm also needs to be looked at

51
Q

What is a collusion

A

Occurs when firms work together to determine price and output

52
Q

What is a cartel

A

Is a collusive agreement among a group of oligopoly firms to fix price and output between themselves

53
Q

What is a Tacit Collusion

A

A collusive relationship between firms without any formal agreement

54
Q

What is a Overt Collusion

A

A collusive relationship between firms involving an open agreement

55
Q

What does collusion do for a firm

A

Maximises Joint profits
Reduces competition costs
Reduces uncertainty in the market

56
Q

Explain a graph for a firm in an oligopoly

A

Firms have price setting power
Collusion means firms produce at a certain price and quantity (MR=MC)
This price allows all firms to make supernormal profits (AR>AC)
Firms have higher producer surplus due to their monopoly power and there is less consumer surplus

57
Q

What are the reasons for possible breakdowns of cartels (4)

A

Enforcement problems : may become a struggle to enforce quotas

Falling market demand : puts pressures of firm to discount price

Successful entry pf non cartel firms : undermines a cartels control in the market

Exposure by market regulators (competition market authority)

58
Q

What is the efficiency of firms in an Oligopoly market

A

Not productively efficient as they don’t produce at the min AC

Not allocatively efficient as they don’t produce where MC=AR

Can be dynamically efficient as they make supernormal profits

59
Q

What are the benefits from Collusion

A

Can bring social benefits , faster development of new technology
Allows smaller firms to compete with monopoly firms
Profits can be used for research and development -> dynamic efficiency

60
Q

What are the drawbacks from Collusion

A

Loss of allocative efficiency
Less consumer surplus (less total welfare)
X inefficiencies and less dynamic efficiency
Less market contestability
Output quotas penalise firms who want to expand

61
Q

What is the incentive for a firm to collude

A

There is an incentive to make a collusion to make supernormal profits

However there is an incentive to break the collusion and therefore experience the benefit from first mover advantage and expand production

Prisoners Dilemma

62
Q

What is a kinked demand curve

Draw it out

A

Where firms are non-collusive and therefore compete on price and quantity, directly effected by other firms in the oligopolies

63
Q

What is the efficiency of firms in a non- collusive agreement

A

Are not allocatively efficient or productively efficient

Can be dynamically efficient as they make supernormal profit

64
Q

What are examples of non price competition

A 
Innovation
Quality of service 
Loyalty schemes
Branding 
Sales promotions
65
Q

Define Price Discrimination

A

Is when a business charges different consumers different prices for the same product

66
Q

State and explain the different types of price discrimination

A

1st degree - charging each different consumer the maximum they would be willing to pay for it
2nd degree- price varying by quantity sold and time of purchase
3rd degree - charging different prices to groups of customers (age, income ect)

67
Q

What are the aims of price discrimination

A

Extra revenue
Increased profit
More balanced cash flow
Uses spare capacity

68
Q

What are the conditions for price discrimination

A

Firms must have sufficient monopoly power
Identifying and separating different groups
Ability to prevent re-sale

69
Q

What is an incumbent firm

A

A firm that is already operating in the market

70
Q

Define Seepage

A

The movement of a product from a high price market to a low price market , reducing profits from price discrimination

71
Q

Define Cross- subsidisation

A

High price group fund low price group , 3rd degree price discrimination

72
Q

What is a contestable market

A

Is a market with freedom of entry and exit

Often have high dynamic efficiency and changing barriers to entry

73
Q

What are sunk costs

Give examples

A

Are costs which cannot be recovered if a business decides to leave an industry , makes the market less contestable

Asset write offs, closure or project cancellation costs , loss of business reputation

74
Q

What is hit and run competition

A

Occurs in a contestable market where new entrants have a share of the supernormal profits and then exit the industry

75
Q

What are the conditions of a contestable market

A

A number of new businesses who are willing to enter the market
No significant entry or exit
Equal access to technology
High rates of consumer switching

76
Q

Define divorce of ownership from control

A

Is the separation that exists between owners of the firm and managers

77
Q

Define satisficing

A

Is making do with a satisfactory sub-optimal level of profit

78
Q

What are the objectives of a firm

A 
Sales maximisation 
Survival 
Growth
Increasing market share
Stakeholder objectives
Profit maximisation
79
Q

What can a contestable market do in terms of competition

A

If markets are contestable the threat of competition will ensure the incumbent firms behave in an economically beneficial manner (dynamic efficiency and free market price) in the long run

Mircroeconomics - 4.1 Individuals , Firms , Markets and Market Failure (8 decks)

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