CH8: Market Structures Flashcards
What are the four standard market structures?
Perfect competition, monopoly, monopolistic competition, and oligopoly.
What is the shut-down rule in the short run?
Produce only if total revenue ≥ total variable cost or if price (AR) ≥ AVC.
What is the shut-down rule in the long run?
Produce only if total revenue ≥ total cost.
What is the profit-maximizing condition for any firm?
Marginal Revenue (MR) = Marginal Cost (MC).
What should a firm do if MR > MC?
Increase output.
What should a firm do if MR < MC?
Decrease output.
What happens when MR = MC?
Profit is maximized (or losses minimized).
What does perfect competition assume about price control?
Firms are price takers; they cannot influence market price.
What does the firm’s demand curve look like in perfect competition?
Horizontal (perfectly elastic) at the market price.
In perfect competition, what is the relationship between AR, MR, and Price?
AR = MR = Price.
Under perfect competition, how does a firm maximize profit?
By producing the quantity where P = MC.
When does a firm earn economic profit under perfect competition?
When AR > AC.
When does a firm break even (normal profit)?
When AR = AC.
When does a firm incur an economic loss?
When AR < AC.
Should a firm with AR < AC but AR > AVC shut down?
No. It should continue in the short run to cover some fixed costs.
Should a firm with AR < AVC shut down?
Yes. It should shut down immediately in the short run.
What is the firm’s supply curve under perfect competition?
The portion of its marginal cost (MC) curve above AVC.
Why does the supply curve slope upward?
Due to increasing marginal cost, which results from diminishing marginal returns.
How is the market supply curve derived?
By summing all firms’ individual supply curves horizontally.
What happens when firms earn economic profits in the short run?
New firms enter the market, increasing supply and lowering price.
What happens when firms incur losses in the short run?
Firms exit the market, reducing supply and increasing price.
When is long-run equilibrium reached in perfect competition?
When P = MC = AC and only normal profits are earned.
Why would a firm expand its scale of production?
To realise economies of scale and reduce average cost.
What is the long-run equilibrium condition when economies of scale exist?
P = SRMC = SRAC = LRAC
What are the characteristics of a monopoly?
One seller, no close substitutes, and blocked entry.
How is a monopolist constrained in setting price?
By the downward-sloping market demand curve.
Why is marginal revenue (MR) less than price for a monopolist?
Because lowering price to sell more affects all units sold.
Where does a monopolist maximize profit?
Where MR = MC
How is price determined by a monopolist?
Based on the demand curve at the profit-maximizing quantity.
Can monopolists earn long-run economic profits?
Yes, due to barriers to entry.
What is monopolistic competition?
A market with many firms selling slightly differentiated products.
What is product differentiation?
Making a product slightly different from competitors to gain some price-setting power.
What is an oligopoly?
A market dominated by a few large firms with interdependent pricing and strategic behaviour.
Name two key features of an oligopolistic market.
Interdependence and barriers to entry.
What is the most common market structure in real-world industries?
Oligopoly.
Give an example of an oligopoly.
Car industry (Toyota, Ford, etc.) or Coffee shops (Starbucks, Costa).
What kind of competition do oligopolists often use?
Non-price competition (advertising, branding, features).
Are entry barriers higher or lower than monopoly in oligopoly?
Lower than monopoly, but still significant.
Why are firms in an oligopoly interdependent?
Because each firm’s actions (price, output) affect the others’ outcomes.
What does the kinked demand curve illustrate?
Price rigidity in oligopoly due to competitor reactions to price changes.
What happens if a firm in an oligopoly raises its price?
Rivals don’t follow → firm loses market share → large drop in demand.
What happens if a firm lowers its price?
Rivals match the cut → little increase in market share → small gain in demand.
Why is there a kink in the demand curve?
Due to the firm’s expectation that competitors will respond differently to price increases vs. decreases.
What shape does the marginal revenue (MR) curve take under the kinked demand model?
Discontinuous, with a gap between MR segments.
What does the kinked demand curve suggest about marginal cost (MC)?
MC can rise or fall within the MR gap without affecting price or output.
What is the equilibrium condition under the kinked demand theory?
Profit is maximised where MR = MC, at the kink point.
