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Economics for Business > Competition and Markets > Flashcards

Competition and Markets Flashcards

1
Q

What are the different degrees of competition by which we classify markets?

A

Number of firms

Conditions of entry/exit to industry

Nature of Product

Information available to buyers and sellers

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2
Q

How does the number of firms affect competition?

A

More firms in a market, greater amount of competition

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3
Q

How do the conditions of entry/exit to industry affect competition?

A

○ E.g. easy market to get into, more likely to have a high no. of firms, more competition

More barriers to entry, difficult for firms to set up, low no. of firms

Firms may have a patent, so other firms find it difficult to enter

Ease of exit depends on ease of entry

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4
Q

How does the nature of Product affect competition?

A

○ Unique product; similar yet different characteristics; homogenous products

○ More differentiated/unique product is, less competition you’re likely to have

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5
Q

How does the information available to buyers and sellers affect competition?

A

○ Perfect, imperfect or asymmetric information.

○ More info there is, better the info, greater the degree of competition

Easier for firms to set up and enter market

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6
Q

Types of Market

A

Perfect Competition (most competitive)
Monopolistic Competition
Oligopoly
Monopoly (Least competitive)

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7
Q

Characteristics of a Perfect Market

A

No. of firms
-infinitely many

Freedom of entry
-unrestricted

Nature of product
- homogenous (undifferentiated)

Examples
-cabbages, carrots (approx.)

Implication for demand curve

  • horizontal
  • firm is a price taker
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8
Q

Characteristics of a Monopolistic Market

A

No. of firms
-many/several

Freedom of entry
-unrestricted

Nature of product
-differentiated

Examples
-hairdressers, restaurants

Implications for demand curve

  • downward sloping
  • relatively elastic

n.b.some control over price- most common

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9
Q

Characteristics of a Oligopoly Market

A

No. of firms
-small number of large firms

Freedom of entry
-restricted

Nature of product
-undifferentiated or differentiated

Examples
-petrol, banking, supermarkets

Implications for demand curve

  • downward sloping
  • relatively inelastic (shape depends on the reaction of rivals)

n.b. interdependence

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10
Q

Characteristics of a Monopoly Market

A

No. of firms
-one

Freedom of entry
-restricted or completely blocked

Nature of product
-unique

Examples
-local water company, train operators (over particular routes)

Implication for demand curve

  • downward sloping
  • more inelastic than oligopoly
  • firm has considerable control over price

n. b. freedom of entry restricted
- 25% of market share, or more

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11
Q

What is Accounting profit?

A

• Accounting Profit = Revenues - Costs

○ Costs: rent for land and capital and wages for labour
○ Revenue = Costs - breaking even

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12
Q

What is economic profit?

A

• Economic Profit: Revenues – Costs

○ BUT: Costs also include opportunity cost
○ Revenue = Costs - making a normal level of profit

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13
Q

define normal profits

A

minimum profit necessary to attract and retain a company.

Accounting: breaking even

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14
Q

define supernormal profits

A

financial returns greater than normal profits.

§ Accounting: profits

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15
Q

define fixed costs

A

costs that do not vary with output

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16
Q

define variable costs

A

costs that change with the level of output

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17
Q

define total costs

A

total cost of producing some output, Q

TC = FC + VC

18
Q

define average cost

A

cost per unit of output

AC = TC/Q

19
Q

define marginal cost

A

cost of producing one additional unit

MC = change in TC / Change in Q

20
Q

Characteristics of perfectly competitive firms

A

-individual demand is perfectly elastic
- firm is a price taker, no control over market price
• Marginal revenue line is also perfectly elastic
○ Equal to average revenue & demand curve

• Maximize profit when marginal cost equals marginal revenue
○ MR = MC
§ This is the profit maximising point for all firms

21
Q

if short-run supernormal profits occur, what happens in the long-run?

A

○ Profits are known to potential entrants
○ Supernormal profits attract firms
○ Entry eliminates supernormal profits

22
Q

In long-run equilibrium, what happens when profit increases?

A

○ Increased profits attract new businesses into the market.

○ The market equilibrium price drops until AR = AC and only normal profits are earned.

23
Q

What is productive efficiency?

A

occurs when the firm is operating at the minimum point on its long-run average cost curve

i.e. producing at most cost efficient level, at min LRAC

24
Q

Are perfectly competitive firms productively efficient?

A

○ In the short run? No

○ In the long run? They are
goods are being produced and sold at the lowest possible average cost.

25
Q

What is allocative efficiency

A

P = MC
price paid for good = benefit to society/ how much people are willing to pay

Producing right amount of the good, firms allocate resources as efficient as possible,

maximises Total welfare of society

26
Q

Why do firms want to avoid perfect competition?

A

cannot make supernormal profits

so they can have some control over price

27
Q

How can firms avoid perfect competition?

A

○ offering differentiated products

○ Introducing barriers to entry

28
Q

What does avoiding perfect competition imply for prices and profits

A
  • supernormal profits provide finance for research & development
    0in long-run only normal profits are made, less innovation
29
Q

define natural monopoly

A

when most efficient number firms in the industry is one

30
Q

implications of a monopoly

A

• Lower output and higher prices than Perfect Competition
○ Hence, society welfare not maximised

• Supernormal profits even in long-run
○ Can be used for R&D

• Firms as allocatively efficient

• Economies of scale
if significant, monopolies can benefit from lower average costs, lower prices for consumers

• Natural Monopoly
- very high fixed costs

31
Q

feature of monopolistic competition

A

• Many firms with freedom of entry and exit
• Differentiated products
• Firms face a downward-sloping demand curve
○ Fairly elastic at any price

32
Q

If a firm makes supernormal profits, what happens in the long-run?

A

○ New entrants come into the market.

○ Established firms lose some customers, demand decreases, demand curve shifts inwards
§ Keeps shifting until normal profit is being made

○ Entry stops when each firm is breaking even.

○ New demand curve is at a tangent to AC

○ Earn normal profits because AR - AC = 0

33
Q

perfect and monopolistic competition

A

Firms have excess capacity: firms could increase output and reduce costs

Firms have market power because P > MC.
○ Always willing to sell one more unit
○ Willing to engage in advertising activities

34
Q

what is interdependence for an oligopoly

A

• High degree of interdependence between firms
-Before I act, how will other firms react, and hence how will this affect my firm

○ Profits of firm i depend on competitors behaviour:
Strategic interdependence πi (qi, qj)

35
Q

define interdependence

A

the behviour of one firm will affect other firms

36
Q

The four outcomes in Game Theory

A
  1. both firms discount
  2. both firms don’t discount
  3. Firm A discounts and Firm B doesn’t
  4. Firm B discounts and Firm A doesn’t
37
Q

What is a dominant strategy game?

A
  • no matter what the other firm does, the best response remains the same
  • both firms have a strategy that dominates, hence always play no matter what other firm does
38
Q

What is a Nash equilibrium

A
  • when both firms are best responding to each other and neither has an incentive to deviate
    i. e. both firms choose one strategy
39
Q

What is the prisoners dilemma?

A
  • both firms better off if they stop playing i.e. both stop discounting
  • neither firm has the incentive to play this strategy
  • nash equilibrium is hence inefficient as firms forced to accept a mutually bad outcome
40
Q

define collusion

A

agreement between two or more firms to limit open competition

41
Q

define collusive agreement

A

leads to competition in the market being restricted

i.e. agreeing prices or quotas

42
Q

what happens when you engage in a collusive agreement?

A
  • a firm aims to become a monopolist- a firm with market power
    i. e. rather than individual firms competing to maximise their own profits, they act as if they are collectively a profit maximising monopolist
    • increases industry profit

Economics for Business (5 decks)

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