Book 1_Econ_Firm and market structure Flashcards
Perfect competition
o If AR ≥ ATC, the firm should stay in the market in both the short and long run.
o If AR ≥ AVC, but AR < ATC, the firm should stay in the market in the short run but will exit the market in the long run.
o If AR < AVC, the firm should shut down in the short run and exit the market in the long run.
Imperfect competition
o TR = TC: break even
o TC > TR > TVC: firm should continue to operate in the short run but shut down in the long run
o TR < TVC: firm should shut down in the short run and the long run
Economies and diseconomies of Scale
o Minimum efficient scale: the average total cost of production is at a minimum or constant returns to scale
o Economies of scale: increasing returns to scale => from labor specialization, mass production, and investment in more efficient equipment and technology
o Diseconomies of scale: bureaucracy of larger firms leads to inefficiency, problems with motivating a larger workforce, and greater barriers to innovation and entrepreneurial activity
Market structure
- Perfect competition
- Monopolis competition
- Olipoly
- Pure monopoly
Perfect competition
Many firm
Very Low barrier of entry
Very good subsititutes
Compete by price only
Pricing power: NO
Monopolis competition
Many firms
Low barrier of entry
Good subsititutes
Compete by price, marketing, features
Pricing power: Some
Oligopoly
Few firms
High barrier of entry
Good subsititutes or differentiated
Compete by price, marketing, features
Pricing power: Some to significant
Monopoly
Single firms
Very High barrier of entry
No subsititutes
Advertising
Pricing power: Significant
- Demand curves
o Perfect competition: perfectly elastic (horizontal)
o Monopolistic => Monopoly: downward sloping
- Short-run output decision for a firm:
o MR = MC
o Price > ATC
- Long-run
o MR = MC
o Price = ATC
- In perfect competition in long run
o Price = MC = ATC
o The product is indifferent, so marketing
Supply and demand under oligopoly
- Kinked demand curve model
- Cournot model
- Stackelberg model
- Nash Equilibriuml
- Dominant firm model
- Kinked demand curve model
o Above PK, the demand curve is considered to be relatively elastic
o if a firm decreases its price below PK, other firms will match the price cut, and all firms will experience a relatively small increase in sales relative to any price reduction
o Therefore, QK is the profit-maximizing level of output
- Cournot model
o The long-run equilibrium, both firms to sell the same quantity, dividing the market equally at the equilibrium price
o With a greater number of producers, the long-run market equilibrium price moves toward the competitive price.
