market power Flashcards
when does the MC curve intersect the ATC and AVC curves?
at their lowest point
spreading the overhead is a term for…
lowering average cost
Suppose you have just opened a store to sell espresso machines. Both you and a competing store buy this machine from a manufacturer for $130 each. Your competitor, who has a store of the same size as yours, is currently selling about 10 machines a month at a price of $200 per machine. You expect to sell about 6 machines a month at a price of $220 per machine. If you lower your price, you expect to incur a loss. Which of the following could explain why your competitor is able to profitably sell the machine at a lower price although the cost of purchasing the machine is the same for the both of you?
The competing store probably has a lower average cost because average fixed cost falls as output increases.
If an airport decides to expand by building an additional passenger terminal, and in doing so it lowers its average cost per aeroplane landing, it was previously operating at:
less than minimum efficient scale.
A monopoly is a seller of a product:
without a close substitute.
If we use a narrow definition of monopoly, then a monopoly is defined as a firm:
that can ignore the actions of all other firms because it produces a product for which there are no close substitutes.
a monopoly is characterised by…
high barriers to entry
no close substitutes
market power
The reason that the coffeehouse market is monopolistically competitive rather than perfectly competitive is because:
products are differentiated.
The key characteristics of a monopolistically competitive market structure include:
many small (relative to the total market) sellers acting independently.
what characteristics is not common to monopolistic competition and perfect competition?
Entry barriers into the industry are low
in a perfect competition market each firm…
Produces a good that is identical to that of the other firms
Assume the market for organic produce sold at farmers’ markets is perfectly
competitive. All else being equal, as more farmers choose to produce and sell
organic produce at farmers’ market, what is likely to happen to the
equilibrium price of the produce and profits of the organic farmers in the long
run?
The equilibrium price is likely to decrease, and profits are likely to decrease
list the characteristics of a perfect competition market
there is a large number of firms compared to the market
all firms sell identical products
there are no restrictions to entry by new firms
Both individual buyers and sellers in a perfect competition market
Have to take the market price as a given
how do monopolistically competitive firms maintain economic profits in the long run ?
creating value for customers
achieving lower average costs of production than its competitors
Under monopolistic competition, the differentiation of products implies that:
Individual firms face downward sloping demand curves
When a firm faces a downward-sloping demand curve, marginal revenue
is less than price because a firm must lower its price to sell more.
When economies of scale are present at all relevant levels of output, the
market is a
natural monopoly
Encouraging firms to invest in research and development and individuals to
engage in creative endeavours such as writing novels is one justification for:
Government-created monopolies
An example of a government-imposed barrier to entry gives a firm the
exclusive right to a new product for a period of 20 years from the date the
product is invented. This entry barrier is known as a/an:
patent
Internalising a positive externality will cause a
decrease in price and an increase in quantity
what is a positive externality?
when a benefit spills over to a third party. e.g. government subsidising goods and services
define a monopoly
A monopoly exists only in the rare situation in which one firm is producing a good or service for which there are no close substitutes
Can a firm be a monopoly if close substitutes for its product exist?
No
what is a natural monopoly?
A natural monopoly is a situation in which economies of scale are so large that one firm can supply the entire market at a lower average cost than two or more firms can.
what are the 4 most important ways a firm can become a monopoly?
- patents
- one firm has control of a key raw material necessary to produce a good
- newtork externalities
- a natural monopoly situation - economies of scale are so large that one firm can supply the entire market at a lower average cost than 2 firms
a monopolists demand curve is…..
downward sloping
why can a monopolist earn economic profit even in the long run
it does not face the entry of new firms in the market
how do monopolists maximise profits?
like all other firms, monopolists maximise profits by producing where marginal revenue equals marginal costs
how does a monopoly affect economic efficiency
by charging a higher price and producing less, which reduces consumer surplus and economic efficiency
what is dead weight loss
Deadweight loss refers to the loss of economic efficiency when the equilibrium outcome is not achievable or not achieved. In other words, it is the cost born by society due to market inefficiency.
Explain why market power leads to a deadweight loss.
market power is the firms ability to charge at above marginal cost prices. Economic surplus is equal to the sum of consumer surplus plus producer surplus. By increasing price and reducing the quantity produced, the monopolist has reduced economic surplus
what is price discrimination?
Price discrimination occurs if a firm charges different prices for the same product when the price differences are not due to differences in production costs.
what are the 3 requirements that must be met for a firm to practice price discrimination?
- a firm has market power
- some consumers must be more willing to pay for the product than other consumers and firms must be able to know what customers are willing to pay
- firms must be able to segment the market for the product so that consumers who buy the product at a lower price cannot sell for a higher price
Firms that are not monopolies have an incentive to avoid competition by engaging in ____
collusion
what is collusion?
agreeing to charge the same price or otherwise not to compete
In Australia, trade practices laws are aimed at deterring monopolies, eliminating _____ and promoting _______ between firms.
collusion; competition
________ has responsibility for enforcing competition, including the regulation of mergers between firms
The Australian Competition and Consumer Commission (ACCC)
what is a horizontal merger
A horizontal merger is a merger between firms in the same industry
what is a vertical merger
A vertical merger is a merger between firms at different stages of production of a good
A firm competing in a monopolistically competitive market sells
differentiated products
A firm competing in a monopolistically competitive market has a ___________ demand curve
downward-sloping
why is the marginal revenue curve of monopolistically competitive markets downwarrd sloping?
When a monopolistically competitive firm cuts the price of its product, it sells more units but must also accept a lower price on the units it could have sold at the higher price
every firm that has the ability to affect the price of the good or service that it sells will have a marginal revenue curve ____ its demand curve
below
what is thhe difference between perfectly competitive and monopolistic competition
Perfect competition is a market structure in which there are numerous sellers in the market, selling similar goods that are produced/manufactured using a standard method and each firm has all information regarding the market and price, which is known as a perfectly competitive market. Monopolistic competition is a type of imperfect market structure. In a monopolistic competition structure, a number of sellers sell similar products but not identical products
A final difference involves barriers to entry and exit. Perfectly competitive markets have no barriers to entry and exit; a firm can freely enter or leave an industry based on its perception of the market’s profitability. In a monopolistic competitive market there are few barriers to entry and exit, but still more than in a perfectly competitive market.
how does the demand curve differ between perfectly competitive and monopolistically competitive markets
perfectly competitive firms have perfectly elastic demand, therefore the demand curve is horizontal.
monopolistically competitive firms have some pricing power, therefore face a downward sloping demand curve
With a downward-sloping demand curve, why is average revenue equal to price? Why is marginal revenue less than price?
average revenue is equal to price because it is the total revenue divided by the quantity sold. therefore, by definition they must be equal.
marginal revenue is less than price because with a downward sloping demand curve, A monopolistically competitive firm must reduce the price to sell more, so its marginal revenue curve will slope downwards and will be below its demand curve.
Why doesn’t a monopolistically competitive firm produce where price equals marginal cost, as a perfectly competitive firm does?
A monopolistically competitive firm maximises its profit at the level of output where marginal revenue equals marginal cost. Price equals marginal revenue for a perfectly competitive firm, but price is greater than marginal revenue for a monopolistically competitive firm. Therefore, unlike a perfectly competitive firm, which produces where
P=MC, a monopolistically competitive firm produces where P>MC
.
Should a monopolistically competitive firm take into account its fixed costs when deciding how much to produce? Briefly explain
No. a monopolistic competitive firm will maximize its profits by producing goods to the point where its marginal revenues equals its marginal costs. The profit maximizing price of the good will be determined based on where the profit-maximizing quantity amount falls on the average revenue curve.
how do monopolistically competitive firms lose profits in the long run when they make profits in the short run?
entry of new firms will eliminate those profits in the long run.
Monopolistically competitive firms continually struggle to find new ways of differentiating their products as they try to stay one step ahead of other firms that are attempting to copy their success
how do monopolistically competitive markets maintain profits in the long run
the exit of existing firms
