5.1 Perfect Competition Flashcards
what are the different market structures?
perfect competition
monopolistic competition
oligopoly
monopoly
how is a market structure characterised?
number of firms in the market
degree of product differentiation
ease of entry to market
the more firms there are the more…
competitive the market is
the more differentiated the product…
the less competitive the market
what are products like in a perfectly competitive market
homogenous
how can products be differentiated?
price, branding, quality
what does the differentiation of a product effect?
cross ped
what are barriers to entry designed to do?
prevent new firms from entering the market profitably
examples of high barriers to entry
economies of scale
brand loyalty - makes demand more elastic
controlling important technologies in the market
having a strong reputation
what is an important objective of most firms?
profit
what is profit
TR-TC
the reward that entrepreneurs yield when the take risks
when do firms break even
when TR=TC
when is a firms profit maximised?
when they are operating at the price and output which derives the greatest profit
MC=MR
what does MC=MR mean
each extra unit produced gives no extra loss or no extra revenue
when do profits increase
when MR > MC
why do some firms choose to profit maximise
provides higher wages
retained profits are a cheap source of finance rather than getting loans
what is the principal agent problem?
when the agent make decisions for the principal
but the agent is inclined to act in their own interests rather than those of the principal
what is an example of the principal agent problem?
when shareholders and managers have different objects that might conflict
what are other possible objectives of a firm
survival growth increasing their market share quality maximising sales revenues
what is profit satisficing
when a firm is earning just enough profit to keep shareholders happy
characteristics of a perfectly competitive market
many buyers and sellers sellers are price takers perfect knowledge homogeneous goods firms are short run profit maximisers
how is price determined in a perfectly competitive market
by the interaction of demand and supply
why are profits likely to be lower in a competitive market
because each firm has a small market share and their market power is small
