lecture 7 Flashcards
Perfect competition =
entirely free
the degree of competition in different markets
importance of competition
markets where there are few competitors;
-their price competition
-other form of competition
markets with many competitors;
- forms of competitions
Factors affecting the degree of competition
number of firms
Freedom of entry (free, restricted or blocked)
nature of product (homogeneous aka same or differentiated aka has alternative)
nature of demand curve—degree of control the firm has over the price
Perfect competition
has many firms
freedom of entry is unrestricted.
nature of products is homogeneous (unidifferentiated),
Example: cabbages, carrots,
implications for demand curve faced by the firm = horizontal firm is a price taker
Oligopoly
has few firms
freedom of entry is restricted
nature of products is unidifferentiated and differentiated
Example: petrol, cars, electrical appliances
implications for demand curve faced by the firm = downward sloping, relatively inelastic (shape depends on reactions of rivals)
Monopoly
has one firm
freedom of entry is restricted or completely blocked
nature of products is unique
Example: local water company, train operators (over particular routes)
implications for demand curve faced by the firm = downwards sloping more inelastic than oligopoly, firm has considerable control over the price
Monopolistic Competition
has many/several firms
Freedom of entry is unrestricted.
nature of products is differentiated
Example: builders, restaurants
implications for demand curve faced by the firm = downwards sloping but relatively elastic
distinction between short- and long-run
short: holding constant, aka capital variable
Normal profits is cost of having premium, labour
supernormal profits are making profits above what is expected to make, which attracts other people into industry
Perfect competition assumptions
firms are price takers; freedom of entry of firms into industry; identical products; perfect knowledge
SHORT RUN perfect competition
price is given by market demand and supply
output is where p = mc
profit is (AR-AC) X Q
-POSSIBLE SUPERNORMALS PROFITS
IN INDUSTRY ITS MILLIONS
IN FIRMS ITS THOUSANDS
Perfect competition
the long run—equilibrium of the firm ( the optimal outcome)
All supernormal profits competed away
LRAC = AC = MC = MR = AR
Monopoly has
- importance of market power and concentration ratios
Monopoly barriers to entry: maintaining a monopoly
economies of scale ( the bigger you get, the cheaper it gets to produce (MC GOES LOWER THAN AC))
economies of scope, product differentiation and brand loyalty, lower costs for an established firm, access to, control over or ownership of key inputs or outlets, legal protection, mergers, takeovers and aggressive tactics
Under which of the following market structures does Tesco operate?
Oligopoly
Contestable Markets
Importance of potential competition: low entry costs and low exit costs
perfectly contestable markets
contestable markets and natural monopolies
Which one of the following would not be a barrier to a firm entering an industry?
An upwards sloping long run avarage cost curve
Monopolists demand curve is
donwards sloping MR BELOW THE AR
equilibrium price and output MC = MR
- measuring level of supernormal profit
