Competition Flashcards
What is perfect competition?
When there are a large number of buyers and sellers, selling homogenous products, who have no barriers to exit/entry. None of the producers are larger than the market and consumers/producers have perfect knowledge about the market. The companies are all price takers.
For price takers in perfect competition, is demand elastic or inelastic?
Perfectly elastic at the prevailing market price - can sell as many or as few units as it likes at that price, without having to lower the price to sell more.
If price takers in perfect competition, what do their prevailing market prices also show?
Their marginal and average revenue - they are the same as the current market prevailing price.
Total profits = ?
Profit per unit x the number of units sold
Why are Average Costs and Normal Profits synonymous in a competition context?
Because Average Costs are the amount you typically spend, while normal profits are this amount that keeps your company in production (i.e. the amount you typically spend)
What are economic profits?
Above normal profits (the minimum return on capital to stay in business)
In a perfect competition, what is the breakeven point?
P = AC = ATC = MC = AC
What are losses?
When the revenue per unit is below the average cost of production (when the market price is not sufficient to cover total costs)
How can firms avoid being shut down?
Alter their variable costs
What is the shut down price equal to?
The minimum average variable cost (AVC) (i.e. if the revenue it gets from producing is less than the variable cost of production) - if TR
If P > AC…
Then the firm will continue to produce at a profit
If P > AVC…
Then the firm will continue to produce in the short run
If P
The firm shuts down
Where on a marginal cost graph should production occur?
At the maximisation point (when the line is curving upwards), the point where the marginal cost is rising and intersecting with the average variable cost line
Where is the short-run supply curve in relation to the MC and the AVC curves?
The part of the MC line that lies above the AVC curve
What must be covered in order for firms to remain in production?
The Average Total Costs (ATC)
Why is does the supply curve curve upwards?
Because the greater amount that is received from the price at which the goods are sold (x axis), the larger the quantity that can be produced (y axis) - this means that it can cover a greater amount of the marginal costs needed to produce one extra unit each time. The greater the prices, the greater the quantity because the greater the firm can cover marginal costs to produce that one extra unit.
Where is the long run supply curve in relation to MC and ATC on a graph?
The portion of the MC that lies above the minimum point of ATC
What is the supply curve?
The sum of all the outputs of all the firms of an industry over a period of time in question
What does a market supply curve show?
The sum of the supplies of the individual firms in the industry
Why do firms need a higher marginal price in the short term?
Because the increase in labour (the only option in the short run to increase output) creates greater marginal cost - does not necessarily apply for the long term, when the scale of operations can be changed
What is long-run competition like?
Firms are free to enter/exit the industry, (if firms think they can incur losses they can exit); if economic profits can be earned, new firms can enter. P > AVC implies entry, P
What happens when new firms enter into the industry?
Prices fall because supply expands. This causes the market price to fall and above-normal profits (economic profits) to decline
What shows a healthy margin?
Prices above ATCs
At what point will new firms stop entering the industry/the market supply curve will stop shifting to the right?
When the market is so saturated and prices are so low that there are no opportunities to make economic profits - the market price touches the minimum point of the ATC on the cost curve,
At which point is there no incentive for firms to stop leaving?
When enough firms have left for prices to start rising again (so that the supply curve shifts to the left because output decreases), touching the minimum ATC where the firm is just breaking even
When does long run equilibrium prevail?
When all firms earn normal profits (no incentive to entry or exit), and when the market price is just sufficient to cover minimum ATC (breakeven point)
What happens when companies enter in the short run?
1) Prices will be pushed up to a higher level by a hike in demand. 2) The supply curve will increase and shift to the right until the companies are just about to breakeven. 3) The new equilibrium is established (increase in demand absorbed by an increase in quantity - both rise)
What happens when companies enter in the long run?
Prices of production do not go up and only the quantity produced goes up. (Greater efficiency?)
Can perfectly competitive firm/s industry earn above normal profits in the long run?
No, only in the short run because of potential competition in the market (which eventually drives prices down)
What are monopolies?
1) One firm that supplies an entire market, 2) that does not have any substitutes. 3) Significant barriers to entry. 4) 25% is the maximum % market share that a monopoly typically has
What can monopolies be created by?
1) Size of market; 2) patent rights; 3) lower costs for an established firm; 4) government licensing; 5) strategic pricing; 6) brand loyalty; 7) ownership of raw materials
When can natural monopolies be established?
When the size of the market is small, relative to the range of production over which economies of scale can be achieved - single firm can produce at relatively low ATC
in the short term, do costs matter for monopolies?
No - only difference is whether they want to employ large or small scale operations.
What happens to marginal revenue for a monopolist?
Positive for price reductions in the elastic region (greater elasticity and greater response in quantity supplied); 0 at the unit elastic region; negative for price reductions in the inelastic region (less responsive to quantity supplied given a change in price, less % change)
When do monopolies maximise profits?
When marginal costs (MC) = marginal revenue (MR) [breakeven]
How could a monopoly find a way to become profitable if it is making losses, by setting a price below average costs?
Move to a smaller scale of operations that are more in line with the amount that people will purchase (and reduce average costs)
What is price discrimination?
When a firm changes prices to target different individuals/groups. Different prices charged to different consumers reflect different preferences in the demand curve.
How would price discrimination affect profits?
Profits = difference between price and average cost for each unit;
What is first degree price discrimination?
When individuals are collectively willing to buy at each price point above the breakeven cost (MC = AC)
What is second degree price discrimination?
Charging different prices depending on how much consumers buy
What is third degree price discrimination
Exploiting differences in willingness to pay (dividing consumers into groups and charging different prices for premium vs ordinary products etc)
How can monopoly firms limit pricing?
By setting the price just below the costs potentially incurred by new entrants (prevents prices from falling as supply floods the market)
Why is it difficult for monopolists to maintain their positions of advantage in the long term?
Their profits incentivize other firms to join the market. It becomes difficult to sustain its developments, changes in demand and the development of substitute products
Often, monopoly power is____
Transitory
Firms can earn above normal profits in the ______ run, but free entry of other firms ensures that only normal profits can be earned in the ______ run
Short, Long
What is monopolistic competition?
When each company is a monopoly supplier for a specific product, but it is a competitive industry because there are other companies doing the same thing with different products
Consumer loyalty implies that monopolistic firms face a ______ sloping demand curve
Downward
