M10/11 Flashcards
What is monopolistic competition?
This occurs when there are many small firms competing for market share, these firms have more/less/equal output and their products are differentiated
When firms make abnormal profit other firms are attracted into the industry and share out these profits in a similar way to what happens in perfect competition, when this happens :
In the short run any inc in demand shifts the demand curve right enabling firms to enjoy abnormal profit
Barriers are low but present. Brand names etc are used to attract customers to a firm and keep the, returning. It’s the perfect playground for an advertisement war. Clothing, costume jewellery etc falls into this category
Describe business decisions under monopolistic competition
Heavy advertisement war aiming at increased market share
Advertising must be followed by a purchase
When does a market failure occur?
When the price mechanism does not operate efficient and third party intervention is necessary
What are missing markets?
When the private sector does not attract any firm to produce a good or service because profit cannot be made by charging users. Public goods are an example
What is abnormal profit
Seen as a market failure because a perfect market will charge a price equivalent to the marginal cost as in perfect competition so any market turning out abnormal profit charges a price above marginal cost. It is a misallocarkom of scarce resources
What are costumer protection laws?
Need for them indicates that producers are abusing of their market power and not returning to consumers what is their due. In this case give must intervene
What are minimum wage laws?
The free market forces will determine the price of labour, the wage. If the wage is not sufficient to provide a worker with his essentials and government must intervene, then a market failure has arisen
What are monopsony and trade unions?
Single employer with no rival employers has monopoly power therefore gives rise to market failure as he employes less than equilibrium and pays lower wages than equilibrium simply because workers have no alternative but to accept what he is paying or not work. trade union intervention takes place whenever workers need protection
What are externalities?
Producers create negative spillovers when producing. They create pollution in various forms, air, sound and a deterioration of areas of natural beauty. Government mus intervene to force producers to cut down on pullution or internalise this external cost by paying for its removal . Without this, firms will aim at maximum profit and minimum costs by ignoring the externalities , these are called external costs
What is productive efficiently ?
It is concerned with producing good and services with the optimal combination of inputs to produce maximum output for the minimum cost. To be productively efficient means the economy must be producing on its PPC
What is the allocative efficiency?
Refers to a situation in which anyone is made better off in some way and these gains exceed any losses anyone else may have suffered
What is Pareto efficiency?
Involved in allocative efficiency. It refers to a situation in which the only way someone can be made better off is at the expense of someone else. Shown by the movement from one point to another on the PPC
What is the optimal level of output where external costs and benefits are brought into the equation in production
If the marginal private benefits and marginal private costs alone are considered then firms can produce any output at lower prices but if marginal external benefits are added to marginal private benefits then marginal social benefits are reached.
What is government intervention?
When price mechanism doesn’t work the govt can intervene and set price ceilings- price cannot increase to more than a specified price or price floors- the price cannot increase to less than a specified price
