Competitive and concentrated markets Flashcards
STUDY
What are the three factors that characterise market structures?
The number of firms in the market, product differentiation, and barriers to entry and exit.
What are structural barriers to entry?
Barriers due to differences in costs of production
What are strategic barriers to entry?
Barriers due to pricing policies
What are statutory barriers?
Barriers that prevent the legal production of a product by other firms e.g. patents and copyright
What are the four main objectives of a firm?
- Profit maximisation. Marginal revenue = marginal cost
- Survival
- Increased market share
- Growth (increase size of firm)
-Other objectives include: Worker welfare, managerial personal gains, environmental…
What are the 6 characteristics of a perfectly competitive market?
- Perfect information for buyers and sellers
- Homogenous goods
- Infinite number of buyers and sellers
- No barriers to entry or exit
- Firms are price takers
- Firms aim to maximise profits in the short run
Bonus charcteristics include: high competitiveness, low profits, low prices
Why might firms aim for profit maximisation?
To increase worker wages, to increase dividends earned by shareholders, to increase investment.
Why might firms aim to maximise growth?
To take advantage of economies of scale.
What is a pure monopoly?
When there is only one firm in a market.
What is monopoly power?
The ability of a firm to act as a monopoly, gained when the firm has over 25% market share. Can also be gained by multiple firms in an oligopoly, for example through collusion.
What influences monopoly power?
Barriers to entry and exit, number of competitors, advertising, product differentiation (more differentiation can grow market share).
What are examples of barriers to entry?
Brand loyalty, economies of scale, limit pricing (pricing below other firms costs), set-up costs, ownership of resources, sunk costs (high unrecoverable costs), patents, differences in costs of production.
What is the concentration ratio?
The cobined market share of the top few firms in a market, as a percentage.
What are costs of monopoly power?
Higher prices, profits and inefficiency can lead to misallocation of resources.
Exploitation of consumers due to higher prices and restricted output.
Loss of allocative efficiency.
No competitors increasing inefficiency.
Loss of consumer surplus and gain of producer surplus.
What are benefits of monopoly power?
Economies of scale can be exploited for lower average costs.
Huge profits - could increase investment.
Increased invention and innovation.
