4.3- Flashcards
What are the characteristics of monopolistic competition?
-No barriers/freedom to entry to and exit
-Product differentiation- however lots of relatively close substitutes. This makes XED of g/s sold high.
-Firms are allocatively and productively inefficient.
-short run profit maximisers.
- Many firms
-Imperfect information
What is monopolistic competition?
- A market structure which contains elements of monopoly and competitive markets
Explain, with the aid of a diagram: Short run monopolistic competition
-In the short run, the diagram for monopolistic competition is the same as for a monopoly.
Explain, with the aid of a diagram:Long run monopolistic competition
-Demand curve shifts to the left due to new firms entering the market.
In the long-run, supernormal profit encourages new firms to enter. This reduces demand for existing firms and leads to normal profit.
Efficiency of firms in monopolistic competition
> Allocatively inefficient.
Productively inefficient.
Dynamically efficient.
X-efficiencent
What are the characteristics of an oligopoly?
-High barriers to entry and exit
-High concentration ratio
-Interdependence of firms
-Product differentiation
Explain and calculate concentration ratios
> Combined market share of top few firms in a market.
> Higher the concentration ratio, the less competitive the market.
> N: Total share
e.g. 4: 70
Explain: reasons for Non-price competition
- Aims to increase loyalty to a brand, which makes demand for a good more price inelastic.
> Price leadership occurs when one firm changes their prices, and other firms follow- explains why there is price stability in an oligopoly; other firms risk losing market share if they do not follow the price change
> Price wars: A price war is a type of price competition, which involves firms constantly cutting their prices below that of its competitors
> Barriers to entry: Firms might try to drive competitors out of the industry in order to increase their own market share
Explain with the aid of a diagram Interdependence: kinked demand curve
-Model suggests price rigidity and that prices will be fairly stable and there is little incentive for firms to change prices. Therefore, firms compete using non-price competition methods.
Explain Types of collusion
> Occurs if firms agree to work together on something.
> Overt collusion is when a formal agreement is made between firms. It works best when there are only a few dominant firms.Acartel is a formal collusive agreement- could be in form of price fixing.
> Tacit collusion occurs when there is no formal agreement, but collusion is implied.
> Non-collusive behaviour occurs when firms are competing- More likely to occur where there are several firms, one firm has a significant cost advantage
Explain the characteristics of a contestable market.
- Freedom of entry/exit
-Low sunk costs
-Entrants to contestable markets have free access to production techniques and technology.
-low consumer loyalty
-Number of firms in the market varies.
Explain contestable markets with the aid of a diagram and efficiencies which do occur
-Supernormal profit in non-contestable monopoly.
- In a contestable market threat of entry keeps price at P2
-Firms are more likely to be allocatively efficient.
-Firms are productively efficient.
-Due to the low barriers to entry which provide easy access to the market, firms are wary of new entrants entering the market, taking supernormal profits, and then leaving. This is also called hit-and-run competition.
Explain: Derived demand for labour
-Demand for labour is a derived demand. This means it depends on demand for the product the worker is producing.
Explain the factors affecting the demand for labour in an industry
- Wage rate: When wages get higher, firms might consider switching production to capital, which might be cheaper and more productive than labor.
- Demand for products:
higher the demand for the products, the higher the demand for labour.
3.Productivity of labour: More productive workers are, higher the demand for them.
- Substitutes for labour:
If labour can be replaced for cheaper capital, then the demand for labour will fall. This will shift the demand curve for labour to the left. - How profitable the firm is:
Higher the profits of the firm, the more labour they can afford to employ. - N.O of firms in the market.
Factors affecting wage elasticity of demand
