Market Structures Flashcards
Perfect Competition characteristics (7)
-infinite suppliers and consumers
-perfectly elastic demand
-perfect information
-identical products
-no barriers to entry or exit
-profit max firms
-all firms price takers
Draw the 4 diagrams when we get supernormal profit in a perfectly competitive market. & explain
Good job hehe
TR > RC = supernormal profit
creates incentive to enter the market
perfect competition so no barriers to entry
S shifts outward
market price falls and profits have been competed away
What efficiency can not occur in a perfectly competitive market
Dynamic, no EoS
What efficiency can perfect competitive markets only achieve
Productive efficiency, assuming there are no EoS
How do governments encourage competition? (3)
-encourage new firms with start up subsidies
-privatise and deregulate large monopolistic industries
-encourage international competition, eg joining EU
What can cause barriers to entry? (6)
-legally protected new innovation or design
-strong branding
-effective advertising
-predatory pricing
-price wars
-gov regulations eg. planning permissions and working conditions
Monopolies characteristics (5)
-25% or more market share
-Price makers
-high barriers to entry
-product differenciation
-few competitors
What efficiency can monopolies achieve
Dynamic, can take advantage of Eos
what efficiencys is a monopoly not
Not allocatively or productively efficient
Draw monopoly profits in the long run & explain
Good job
Explanation:
profit max at MC = MR
producing at Q meaning price is at Pm
this means the AC is ACm
supernormal profits between AC and P
no new firms enter market (high BTE)
this is the long run equilibrium
Why are monopolies not productively and allocatively efficient? + diagram
Firm is not operating at lowest point on AC curve
because of high prices, it is higher than MC and producers are being overrewarded
red area shows missed consumer surplus if price was lower
welfare loss is potential revenue if Q increased
Benefits of monopolies (3)
-dynamic efficiency
-keeps prices low EoS
-because of copy rights and patents, other firms have to get creative with innovation.
Draw the kinked demand curve
explanation
-lose customers if P inc due to close substitutes
-dont gain many customers by dropping price because other firms copy
-however do it to protect market share
benefits of collusion (3)
reduction in market stability
aviodance of direct competition
higher profits
drawbacks of collusion
lower incentive to innovatre
bar to entry for new firms
higher consumer prices
