Market Structures Flashcards
Define homogenous goods
Goods that are exactly the same and make perfect substitutes
What is a price taking firm
A company that must accept prevailing prices in a market, lacking the market share to influence market price on its own
What is perfect elasticity
If demand is perfectly elastic, it means that at a certain price demand is infinite ( a good with a very high elasticity of demand)
What is profit maximisation
Where marginal revenue = marginal cost (MC = MR)
Define entry and exit to market
Requirements to enter and exit the market
What are the characteristics of perfectly competitive market
Homogenous products (all perfect substitutes)
Large number of buyers and sellers -> no one firm has influence over the market
No cost for entry and exit
Perfect information of buyers and sellers
Perfectly elastic demand curve
All firms have access to factors of production
Illustrate a price taking firm making supernormal profit in the short run
Diagram on page 7 of market structures booklet
Illustrate a price taking firm adjustment to long run equilibrium
Diagram on page 8 of market structure booklet
What would be the shut down price for a competitive firm in the short run
P = Min AVC
Illustrate the shut down position for a firm in a perfectly competitive market
Perfect competition in the short run - Tutor2u
Define the shut down price
The minimum price a business needs to justify remaining in the market in the short run
A business needs to make at least normal profit in the long run to justify remaining in an industry but in the short run a firm will continue to produce as long as total revenue covers total variable costs (short run shutdown price)
Define imperfect competition
A market where one of the conditions in a perfectly competitive market is not met
Define monopolistic markets
A monopolistic market is a theoretical condition that describes a market where only one company may offer products and services to the public. A monopolistic market is the opposite of a perfectly competitive market, in which an infinite number of firms operate.
In a purely monopolistic model, the monopoly firm can restrict output, raise prices, and enjoy supernormal profits in the long run.
Define differentiated products
A process of distinguishing a product or service from others, to make it more attractive to a particular target market
Define price making firms
A firm that has some market power to control the price it sells at
Define non-price competition
Involves ways that firms seek to increase sales and attract customers through methods other than price
What are the characteristics of a monopolistically competitive market
Differentiated products
Price making firms
Non price competition
Low barriers to entry + exit
Many buyers + sellers
Define allocative efficency
Markets allocate resources efficiently, welfare is equally distributed in the market
Illustrate a price making monopolistic competition diagram making supernormal profit in the short run
Diagram on page 19 of market structure
Illustrate a price making monopolistic competition diagram making normal profit in the long run
Page 20 of market structure
Define allocative efficiency
When there is an optimal distribution of goods and services, taking into account consumer preferences
(The equilibrium)
Illustrate allocative efficiency on a diagram
Check page 22 on market structure
What is hit and run competition
When a firm temporarily enters a market and then leaves when supernormal profits are exhausted
What is a contestable market
A market where companies can enter and leave freely with low sunk costs (low barriers to entry + exit)
Define oligopoly
A market with a small number of firms (e.g. coffee shops, supermarkets)
Define concentration ratio
The proportional % of a market usually held by the top 3-4 firms (e.g. Tesco, Morrisons, Asda) where one firms decisions effect other firms
Define duopoly
Where there is only 2 firms in the market
Define price rigidity/sticky prices
Where the price of a good does not change immediately or readily to the new market-clearing price when there are shifts in the demand and supply curve
What are the characteristics of an oligopoly
High barriers to entry
Few firms
Non price competition
Interdependent
Illustrate and explain the kinked demand curve
Page 35 of market structures
Define collusion
When two or more parties act together to influence production/and or price levels for their mutual benefit
Define price fixing
An agreement among competitors to raise, lower, maintain or stabilise prices or price levels
Define output quota
A quota is a government imposed trade restriction that limits the number or monetary value of goods that a country can import or export during a particular period
What are the main aims of business collusion
-increase in level of profit the firms can make for all firms as they are mutually interdependent and act together
-collusion lowers the cost of competition e.g. wasteful marketing wars which can run into millions of pounds
-collusion reduces uncertainty in a market and higher profits increases producer surplus/shareholder value - leading to higher share prices
Illustrate a diagram for a collusive oligopoly
Page 52 market structure
Illustrate a diagram for an oligopoly
Check internet
