Market Structure and Market Power Flashcards
What does market structure determine?
Market power
What is market power?
Market power is the extent to which a seller can charge a higher price without losing many sales to competing
businesses.
What are the 4 market structures?
perfect competition.
monopoly.
oligopoly.
monopolistic competition.
What are the 3 characteristics in a perfect competition market structure?
all businesses in an industry sell an identical good, and there are many sellers and many buyers, each of whom is small relative to the size of the market. Sellers have no market power.
What are the 2 characteristics in a monopoly market?
Monopolistic markets are markets in which
there is only one seller. The seller has a lot of
market power
What are the 2 characteristics in an oligopolistic market?
Oligopolistic markets are markets with only
a handful of large sellers. The sellers have
some market power.
What are the 3 characteristics in a monopolistically competitive market?
Monopolistically competitive markets are markets in which many small businesses compete, each selling differentiated products. Product differentiation The sellers have some market power.
What is imperfect competition?
The situation of facing at least some competitors and/or selling products that
differ at least a little from those of competitors
Most businesses do not operate in imperfectly competitive markets. True or False
False
What 2 things is there a trade off between?
It is a trade-off between selling a large quantity of items versus making more money on each item
What is market demand?
Market demand is the quantity demanded across all firms.
What is firm demand?
Firm demand is the quantity demand from your firm.
What is individual demand?
Individual demand is the quantity demanded by a single buyer.
What do good decisions focus on?
Marginal revenue is the addition to total revenue
you get from selling one more unit
What does the marginal revenue reflect?
Marginal revenue reflects the output effect minus
the discount effect.
What is the output effect mean + symbol?
The output effect is the revenue increase from
selling one more unit. P
What is the discount effect + formula?
The discount effect is the revenue loss from
cutting the price on all the units sold. Discount effect = ΔP×Q
How do sellers determine their prices and quantities?
How do sellers determine their prices and quantities?
Keep selling until your marginal revenue equals
your marginal cost. Set your price on the demand curve.
What is the problem with market power?
Market power distorts market forces, leading to worse
outcomes. Sellers exploit market power
Why do governments regulate markets? (2)
laws that ensure that competition thrives.
laws that minimise the harmful ways that businesses
might exploit their market power.
What are 3 laws that enable competition to thrive?
Anti-collision laws: collusion is an agreement to limit collusion
Merger laws
International trade fosters competition
What can the government do to limit firms from exercising their market power?
The government can implement price ceilings to limit
market power. Set price = Marginal cost
By setting the price to be equal to marginal cost, what 2 things does that eliminate?
Eliminates the discount effect
Eliminates the underproduction problem
In perfectly competitive markets, what do price ceilings reduce?
Price ceilings reduce economic surplus
In imperfectly competitive markets, what do price ceilings increase?
Price ceilings increase economic surplus
What is a natural monopoly? + 2 examples
Natural monopoly: A market in which it is cheapest for single business to service the market.
Examples: water, gas electricity
What is the best output for society’s interest?
Price = Marginal cost
What are the problems with natural monopolies?
But Price < Average cost
The supplier would lose money.
Suppliers can stay in business only by offering prices that are too high.
3 solutions governments can use to solve issues with natural monopolies
The government provides goods.
Set Price = Marginal cost
Tax revenues pay for losses
