Competition and Monopolies Flashcards
4 key assumptions in perfect competition
- Many buyers and sellers
- Homogenous product
- Perfect Info
- Free entry and exit of firms in long run
How do SR and LR supply curves differ?
SR - lower y intercept, larger gradient
Why does industry supply curve slope up?
More buyers, cost rise
What do short run profits lead to in perfect competitive market
More firms enter the market
What type of profits aren’t earned in perfect competition
Supernormal profits
How does competition look between firms in the long run in PC
No firms want to leave industry, no firms want to enter
What are 3 key assumptions in monopoly
- Firm is sole supplier of product with no close substitutes
- Firm is protected by barrier to entry
- Faces market demand curve directly
How does marginal revenue differ in PC and Monopoly?
In PC, MR = MC
In Monopoly, the more the firm wants to sell, the lower the price on all units
What happens to revenue when you shift from elastic to inelastic demand?
Reaches equilibrium
When are profits maximised on demand curve for monopolist?
MC = MR at Q1P1
AR> ATC
What would happen if a PC industry had same costs as monopolist on demand curve?
Output higher - Q2 instead of Q1
Prices lower - P2 instead of P1
Deadweight loss is
After MC=MR and before AR=ATC
Price above MC
How does cost advantage influence price in monopolistic industry?
Monopoly will limit entry if it has no cost advantage P2 and if it has cost advantage below P2
How do firms become monpolies?
- Cost Inflation
- Rent-Seeking
- Economies of Scale
- Reward for Innovation
5 characteristics of imperfect competition
- Many buyers and sellers
- Product is differentiated
- Firms do not take price as given
- Perfect customer information
- Free entry and exit of firms
