Competitive and Concentrated Markets Flashcards
What are the four market structures?
In order of concentration, with the most competitive first:
Perfect competition, monopolistic competition, oligopoly and monopoly.
What are the objectives of firms?
Fundamentally, firms aim to maximise profit. However, economists think firms need a variety of objectives. These are:
- Survival
- Growth
- Market share
- Other objectives: employee welfare, protection of the environment and ethical behaviour.
Define perfect competition.
This is a market structure where firms offer homogeneous products and there is freedom of entry and exit (no barriers to entry) and excellent information/knowledge.
Define normal profit.
Normal profit is the minimum level of profit (or reward) needed to keep a firm in that line of business.
What is abnormal (supernormal) profit? What does it mean?
Abnormal profit is extra profit above the level of normal profit.
Abnormal profit means there is an incentive for other firms to enter the industry.
What is pure monopoly?
When there is a single supplier in a market.
What is monopoly power?
When a firm exerts considerable influence in a market due to it’s relatively large size.
UK law suggests that a 25% market share gives a firm monopoly power.
What causes monopoly power to be greater?
- Barriers to entry (prevents new firms from entering the market and thus allows existing firms to exert more influence).
- Few competitors.
- Perceived differences between products (if advertising and manufacturing lead to a product that is perceived to be unique the firm will have more influence on price).
What the concentration ratio?
A measure of the combined market share of the the largest firms in a particular market.
Mainly used in oligopoly markets.
For example, the four-firm concentration ratio would be the sum of the market shares of the four largest firms (30 + 20 + 15 + 10 = 75). The three-firm concentration ratio would be the sum of the market shares of the three largest firms etc..
