Competitive, Monopolistic and Monopolistically Competitive Markets Flashcards

1
Q

What are the key conditions and implications of perfect competition?

A
  • Many buyers and many sellers all ‘small’ relative to the market
  • Each firm produces a homogenous product
  • Buyers and seller have perfect information
  • No transaction costs
  • Free entry and exit
  • Implications
    • A single market price is determined by the interaction of demand and supply
    • Firms earn zero economic profits in the long run
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2
Q

What is the revenue-cost approach to short run profit maximisation for a perfectly competitive firm?

A
  • Total revenue curve is a straight line because the firm is a price taker, and MR = P
  • The firm should produce where P = MC, in the range where MC is increasing
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3
Q

What is the short run cost minimisation strategy for a perfectly competitive firm?

A
  • If the price is above AVC at Q(MR = MC), the firms should continue producing even if running at a loss
  • If the price is below AVC at Q(MR = MC), the firms should shut down to minimise losses
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4
Q

What is the SR supply curve for a perfectly competitive firm?

A

The portion of the MC curve above AVC

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5
Q

What is the LR equilibrium for a perfectly competitive firm?

A
  • Ultimately zero profits will be reached
  • Economies of scale are maximised as AVC is minimised
  • Lerner Index = 0 b/c P = MC
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6
Q

What are the conditions and implications of monopoly markets?

A
  • A single firm serves an entire market for a good that has no close substitutes
  • Implication: Marked demand curve is the firm’s demand curve
  • However a monopolist does not have unlimited market power
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7
Q

What are the sources of monopoly power?

A
  • Economies of scale/scope
  • Cost complementarity
  • Patents/legal barriers
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8
Q

For a monopoly what is the elasticity - total revenue relationship?

A
  • If we know the details of the demand curve:

- Firms can maximise revenue by producing where elasticity = -1

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9
Q

What is the output rule for a monopoly?

A

A profit maximising monopolist should produce the output such that MR = MC

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10
Q

What is the demand MR relationship for a firm with market power?

A
  • Given a linear inverse demand function: P(Q) = a + bQ, where a > 0 and B
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11
Q

What is true of a monopolies profit and market power?

A

Profits depend on cost structure, so having market power does not imply profitability

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12
Q

What is the monopolies supply curve?

A
  • A monopolists market power implies P > MR = MC
  • The firm choose a price quantity combination to max profit, there is not supply curve
    • Supply functions tell us how quantity demanded varies contingent on P. Firms with market power do not take P as given
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13
Q

What is the output rule for multiplant decisions?

A
  • Where MR(Q) is the marginal revenue of producing a total of Q = Q1 + Q2 units of output,
  • The profit maximising rule is to allocate output among the plants such that
  • MR(Q) = MC1(Q1)
  • MR(Q) = MC2(Q2)
  • i.e. the MC in the two plants must be equalised, otherwise arbitrage opportunity exists, and the firm is better off shifting production
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14
Q

What is the situation for a zero profit monopolist?

A

ATC is tangent to demand

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15
Q

What is DWL?

A
  • The consumer and producer surplus that is lost due to the monopolist charging a price in excess of MC
  • Compare with perfect competition by using MC as a supply curve
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16
Q

What are the conditions and implications of monopolistic competitive markets?

A
  • Many buyers and sellers
  • Each firm produces a differentiated product
  • Free entry and exit
  • Implication
    • Products are close, but not perfect substitutes, therefore firm’s demand curve is downward sloping
17
Q

What is profit maximisation for monopolistically competitive firms?

A
  • MR = MC
18
Q

What is the LR equilibrium for a monopolistically competitive firm?

A
  • Additional firms will enter/exit in the LR dependent on profit/loss motive
  • Eventually economic profits = 0
  • P > MC
  • P = ATC (π=0) > minimum of average costs
    • i.e. the LR equilibrium will be where ATC is declining
    • i.e. not maximising economies of scale
    • vs perf. comp. where ATC is minimised