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Economics > Chapter 5 > Flashcards

Chapter 5 Flashcards

1
Q

Define market structure

A

The organisational and other characteristics of a market

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2
Q

Explain the spectrum of market structures

A 
Perfect competition 
Monopolistic competition 
Oligopoly 
Duopoly 
Monopoly
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3
Q

Define market entry and exit barriers

A

Obstacles that make it difficult for a firm to enter a market
Obstacles that make it difficult for a firm to exit a market

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4
Q

What is a firms objective

A

Profit maximisation

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5
Q

Equation for total profit

A

Total profit= Total revenue - Total cost

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6
Q

What is profit maximising in perfect competition

A

Marginal revenue = marginal cost

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7
Q

Draw an MR=MC curve

A

…

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8
Q

Explain the divorce of ownership from control

A

Agent - Directors
Principal- Shareholders

Agents don’t have the same objectives like principles. Principals objectives are profit maximisation.
Agent takes risk for principle but does not receive the same full benefit of their actions so would rather not do it again

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9
Q

Who is principal and agent

A

Agent- Director

Principal- Shareholder

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10
Q

Why can agent get away with not acting in the interest of the principal

A
  • Cost of sacking agent to principal is higher than benefit received
  • Informational asymmetry, the principal does not know if agent is acting in their best interest
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11
Q

Business objectives other than profit maximisation…

A
  • Growth maximisation and survival

- Revenue maximisation

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12
Q

Explain the satisfying principle

A

Achieving a satisfying outcome rather than the best possible outcome
Setting minimum rather than maximum targets

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13
Q

Draw short run profit maximisation in perfect competition

A

…

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14
Q

Draw long run perfect competition where abnormal profit is being utilised

A

…

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15
Q

Explain the role of abnormal profit in the long run of perfect competition

A

Abnormal profit draws firms into a market.

When too many enter some leave and abnormal profit is no longer made

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16
Q

Define productively efficient

A

Impossible to produce more of one good without less of another

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17
Q

Define allocative efficiency

A

Impossible to improve overall economic welfare

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18
Q

Relationship between perfect competition and allocative efficiency

A

When MR=D allocative efficiency has been achieved

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19
Q

Conditions where perfect competition can achieve allocative efficiency

A
  • All markets benefit from available economies of scale
  • Perfectly competitive for all firms
  • No externalities, positive or negative
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20
Q

Allocative efficiency:

Explain P>MC and P

A

Price is higher than cost of production so consumers will be discouraged from spending. So the good will be underproduced and under consumed.

Price is lower than MC, welfare is high but then will begin to fall and equalise.

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21
Q

Define allocative inefficiency

A

P>MC good is underproduced and underconsumed

P

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22
Q

Define monopoly

A

One firm in a market

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23
Q

Draw monopoly profit maximisation

A

…

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24
Q

Why is short run and long run profit maximisation in monopolies the same

A

Because monopolies are protected by barriers to entry, preventing new firms from entering the firm and sharing the abnormal profit.

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25
Q

Define monopoly power

A

Monopolies can preserve profit by keeping competitors out

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26
Q

What are the advantages of monopolies

A
  • Economies of scale
  • Dynamic efficiency
  • Use it’s abnormal profit to better production of product
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27
Q

What are the disadvantages of monopolies

A
  • Productive inefficiency
  • Allocative inefficiency
  • Profit satisfice instead of profit maximise so absence of benefits from economies of scale and innovation
28
Q

Monopolistic competition characteristics:

A
  • Large number of firms
  • LR no barriers to entry or exit
  • So firms will enter to gain abnormal profit
  • Slightly different product, not perfect substitutes
  • MR is below AR still
29
Q

Draw short run monopolistic competition profit maximisation

A

…

30
Q

Draw long run monopolistic competition profit maximisation

A

…

31
Q

Why is AR below MR=D in monopolies

A

Because in order to make more profit by selling additional units , firms must lower their price

32
Q

Difference between informative and persuasive advertising and saturation advertising

A

Informative- increases competition ,provides useful information about the good or service

Persuasive- reduces competition ,little information on the good but persuades for specific product

Saturation- monopolies prevent small firms to enter as they cannot afford the minimum level of advertising

33
Q

Define price competition

A

Reducing the price causes firms to leave other markets and other similar firms to one specific firm

34
Q

Examples of non price competition

A
  • marketing, obtaining exclusive outlets
  • Persuasive advertising
  • Quality competition
35
Q

What is a market concentration ratio

A

Measures the market share of the biggest firms in the market

36
Q

What does oligopoly mean

A

Market containing a few firm

37
Q

Difference between oligopoly and monopolistic competition

A

Oligopoly- in one market

Monopolistic competition- many monopolies with somewhat substitutes, more like perfect competition

38
Q

Can oligopolies affect its rivals profits

A

Yes

39
Q

Define market conduct

A

Pricing and marketing policies pursued by firms

40
Q

Are oligopolies uncertain

A

Yes due to interdependence

41
Q

Difference between collusive and non collusive oligopolies

A

Collusive- where they work together such as cartel

Non collusive- oligopolies not working together and in fact competing

42
Q

Define cartel

A

A collusive agreement by firms usually to fix prices and perhaps reduce output and deter entry of new firms

43
Q

Are cartels / collusion’s of oligopolies good for consumers

A

Normally not but sometimes good

44
Q

Two types of collusion

A

Covert collusion- In secret agreement

Tacit collusion- ‘understanding’ between firms without an explicit agreement

45
Q

Why is the oligopoly demand curve kinked

A

Oligopolies are affected by rivals reaction to output and price changes (estimate of how demand changes to a change of price)

46
Q

Draw the kinked demand curve

A

…

47
Q

Criticisms of the kinked demand curve

A
  • Does not explain how and why firms decide to change their price
  • Firms will normally test markets and adjust
48
Q

Advantages of oligopolies

A
  • Economies of scale and dynamically efficient
  • Only a few firms making it easier for consumers to choose
  • Due to competition constantly innovating and developing better products
49
Q

Disadvantages of oligopolies

A
  • May restrict output and raise prices like monopolies
  • Cartels
  • Small firms may find it hard to enter
  • Producer sovereignty
50
Q

3 ways in which oligopolies can adjust their prices

A

-Price leadership
One firm becomes market leader and other firms follow its pricing examples

-Price agreements
Cartel agreements

-Price wars
Rival firms continuously lose prices to undercut each other and consumer ends up benefitting from cheaper products

51
Q

Define price discrimination

A

Charging different prices to different customers for the same product, with the prices based on different willingness to buy

52
Q

Draw two price discrimination graphs

Why is MC the same

A

…

Because it costs the same as it is price discrimination

53
Q

What are the conditions of price discrimination

A
  • Identifiable groups
  • These groups must have different elastic i ties of demand
  • Prevent seepage (paying off to others)
54
Q

Difference between contestable and non contestable markets

A

Contestable - Market with potential for new markets to enter (No entry/exit barriers, no sunk costs, same technology)
Non contestable - opposite of contestable

55
Q

Define sunk cost

A

Costs incurred from entering a market that are unrecoverable

56
Q

Example of a sunk cost

A

Rent

57
Q

What do sunk costs do to hit and run competition

A

Discourage it

58
Q

Define hit and run competition

A

A new entrant can ‘hit’ the marker, make profits then ‘run’ due to low entry and exit barriers

59
Q

Define static efficiency

A

Efficiency at a particular point

60
Q

Define dynamic efficiency

A

In particular productive efficiency occurring over time which results from technical progress and innovation

61
Q

Define consumer surplus and when is maximisation of welfare

Define producer surplus

A

Consumer surplus: difference between maximum prices a consumer is prepared to pay and actual price. MW is when the triangle expands e.g when prices fall

Producer surplus: Difference between minimum price a firm is prepared to charge for a good and actual price charged.

62
Q

What does consumer and producer surplus measure

A

Welfare

63
Q

Draw consumer and producer surplus

A

…

64
Q

Define deadweight welfare

A

The loss of economic welfare when the maximum attainable level of total welfare is not achieved

65
Q

Draw Consumer surplus and producer surplus in monopoly

A

…

66
Q

Why does price discrimination benefit firms

A

Because it allows firms to increase profit by taking consumer surplus away from consumers and converting it into additional abnormal profit. Consumers suffer and firms benefit

Economics (15 decks)

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