7.1 Introduction to firms, industries and market structures. Flashcards
Market Power
Refers to the control that a seller has over a price
The ability of a firm to charge a price greater than a marginal cost.
P>MC
Perfect competition
Where firms have no ability to control the price of its product .
= Zero market power
Monopoly
When there is a single firm in the market
-the firm has the greatest ability to control the price of its product.
Imperfect competition
(Firms face some competition but also have market power)
- Monopolistic competition
- Oligopoly
Three main main characteristics of Market structures.
- Product differentiation
- Barriers to entry
- Free entry
Product differentiation
The products can be made different from each other, or not identical.
Barriers to entry
How easy or difficult it is to enter a market.
-Refrer to anything that can prevent a firm fro entering an industry
and beginning production.
Free entry
When theres no barriers to entry into an industry we say there is free entry.
Characteristics of Perfect Competition
- There is a very large number of firms in the industry
- All the firm in the industry sell homogenous products.
(homogenous) - undifferentiated, no brand names - No barriers to entry
Characteristics of monopoly
- There is a single seller(One firm that dominates the market)
- The firms produces ad sell a unique good or service(No substitutes)
- High barriers to entry
Characteristics of monopolistic competition
- There is a fairly large number of small , or medium sized, firms in the industry.
- There no barriers to entry.
- There is product differentiation.(Firms try to make their products different from each other )
Characteristics of oligopoly
- There is a small number of large firms in the industry.
- Products can either be differentiated(cars) or undifferentiated(oil)
- High barriers to entry
Why we bother with perfect competition.
When its unrealistic
Its the only market that achieves allocative efficiency
