market structures Flashcards
market structures
1- perfect competition
2- monopoly
3- monopolistic competition
4- oligopoly
perfect competition
main assumptions of perfect competition are:
i. Large number of buyers and sellers, therefore firms price-takers.
ii. No barriers to entry (also implies free mobility of factors of production).
iii. Identical/homogeneous products
iv. Perfect information/knowledge
Concentration ratio
Is used to assess the level of competition in an industry It is simply the percentage of total industry output that is produced by the 5 largest firms in the industry.
The Short Run and Long Run under Perfect Competition
The short run is the period where at least one factor of production is fixed. In perfect competition, it also means that no new firms can enter the market. In the long run, all the factors of production are variable.
Allocative efficiency
the optimal point of production for any individual firm is where MR=MC. The optimal point of production for any society is where price is equal to marginal cost. This is called the point of maximum allocative efficiency.finding the perfect balance where the cost of making something matches the price people are willing to pay
Productive efficiency:
means producing the maximum amount of goods or services using the least amount of resources. Perfectly competitive firms also achieve this in the long run because they produce at P=MC
MONOPOLY
A situation where there is a single producer in the market.single firm that influences the market price by how much it produces.
PRICE DISCRIMINATION
Price discrimination (PD) happens when a producer charges different prices for the same product to different customers.
Types of Price Discrimination
PD can be of three types: 1st degree (everyone charged according to what he can pay), 2nd degree (different prices charged to customers who purchase different quantities) and 3rd degree (different prices to customers in different markets)
MONOPOLISTIC COMPETITION
Monopolistic competition is also characterized by a large number of buyers and sellers and absence of entry barriers.
OLIGOPOLY
Similar to monopoly in the sense that there are a small number of firms (about 2-20) in the market and, as such, barriers to entry exist.market structure dominated by a small number of large firms, selling either identical or differentiated products, or significant barriers to entry into the industry. This is one of four basic market structures. For example, Cement, cars, electrical appliance, oil.
Collusion:
Collusion occurs when two or more firms decide to cooperate with each other in the setting of prices and/or quantities.
Cartel
a cartel is a group of businesses or companies that agree to work together instead of competing. They do this to control prices, limit competition, and often maximize their profits
Break down of Collusive Oligopoly
it’s when a few companies agree to work together, often by setting production quotas or coordinating prices. They act almost like a team to avoid intense competition and maximize their combined profits.
Prisoner’s Dilemma Situation
Each company is like a player trying to make the most profit.
They’re all guessing what the others will do, like trying to predict the other companies’ next moves in a game.
Here’s the twist: When everyone acts independently, trying to beat the others, they often end up in a situation where everyone makes less money compared to if they had worked together.
It’s like they’re all playing a tricky game, and instead of teaming up, they’re trying to outsmart each other.
Maximin
Maximin strategy is a cautious (pessimistic) approach in which firms try to maximize the worst payoff they can make.
Maximax strategies
A maximax strategy involves choosing the strategy which maximizes the maximum payoff (optimistic).
Kinked Demand Curve
The kinked demand curve is a way to explain how your rivals might react to changes in your prices.
Above the kink: If you increase your price, your competitors might not follow, thinking it’s too high. Customers might then shift to the competitors, and you lose a lot of sales. So, above the kink, the demand for your product is really elastic.
Below the kink: If you lower your price, your competitors are likely to follow suit to keep up. Customers might not switch because prices are similar. So, below the kink, the demand for your product is inelastic
Non Price Competition
Non price competition means competition amongst the firms based on factors other than price, e.g. advertising expenditures.
Oligopoly & public interests
In oligopoly, firms are able to earn super normal profits. This is also the feature of monopoly. But this is
not the feature of perfect competition & monopolistic competition. Firms can use their profits in cost
minimization techniques.
WELFARE ECONOMICS
It is a branch of economics dealing with normative issues (i.e., what should be). Welfare economics is a
branch of economics that uses microeconomic techniques to simultaneously determine allocative
efficiency within an economy and the income distribution associated with it. It analyzes social welfare
in terms of economic activities of the individuals that comprise the theoretical society considered.analyzing social welfare in terms of economic activities, we’re trying to understand how the jobs and work that each person in this community does contribute to everyone’s well-being or happiness.
THE MARGINAL PRIVATE COST OF ADVERTISING
The marginal private cost of advertising is the cost of every additional TV commercial or newspaper advertisement that a firm has to bear
MARGINAL SOCIAL COST
it’s a concept used to understand how the addition of one more unit of a product or service affects not just the individual, but the whole society, including factors like environmental impact or congestion
The marginal social cost = marginal private costs that the firm incurs + any other costs that is borne by
the society because of the production of additional good
THE CONCEPT OF EXTERNALITY
an externality exists when the production or consumption of a good directly affects businesses
or consumers not involved in buying and selling it and when those spillover effects are not fully
reflected in market prices.
A positive (negative) externality arises from the beneficial (harmful) spillover effect of production or
consumption for society. If the externality is a result of private production decisions, it is called a
production externality. If it is caused by private consumption decisions, it is called a consumption
externality.
OPTIMAL LEVEL OF PRODUCTION
A socially optimal level of production of a good means the level of production at which the externality
is fully internalized,
A tax (subsidy) raises (reduces) prices by shifting the supply curve vertically upwards (downwards).
In simple terms, finding the right amount of ice cream for everyone (socially optimal level) means considering all the good and bad effects. Taxes and subsidies can make ice cream more or less expensive. Market failure happens when not everything is considered, making it harder to use resources efficiently in the ice cream market
MERIT GOOD
Merit good is a good which Govt like people to consume more. A merit good in economics is a
commodity which is judged that an individual or society should have on the basis of a norm other than
respecting consumer preferences. Examples include food stamps, health care, and subsidized housing.
PUBLIC GOOD
A public good is one whose benefits are indivisibly spread among the entire community, whether or not
particular individuals desire to consume the good or not.
There are two characteristics which give rise to public goods: non-rival ness (one person’s use or
consumption of the good does not reduce the ability of another to use it; e.g. air) and non-excludability
(it is not possible to exclude anyone from the consumption of the good; e.g. national defense).
The Demand for Factor of Production
The demand for factors of production (like labor) is a derived demand, because it is “derived” from the
goods market. For e.g., the demand of labor increases when the demand for a labor-intensive good rises,
and as firms try to produce more of that good by employing more labor.
Leisure
Leisure is the time not used for working, or earning wages. It is usually the time that a laborer uses for relaxation and all activities other than work or necessary sleep.
The Marginal Disutility of Work (MDUW)
As the supply of hours of labor increases, wage rate should also be increased. The relationship between
hours provided by labor and wage rate is positive. And the curve for labor supply curve is positively
sloped. But this curve can also be negatively sloped due to the marginal disutility of working hours.
The marginal disutility of work (MDUW) means the negative impact on the working of laborer for one
additional unit of time. The MDUW curve defines the supply curve for labor.
The Opportunity Cost:
The opportunity cost of working is leisure (and vice versa) that the worker could have enjoyed during
that time had he not been working.
Supply and Demand Curve for Labor
The labour supply curve may bend backwards above a certain wage rate as the income effect of higher
wages dominates the substitution effect of higher wages.
The wage rate is the marginal cost of labour to the firm and is directly proportional to the hours worked.
The demand curve for labour can be derived from the intersection of the wage rate lines (horizontal
parallel lines) and the marginal revenue product of labour (a downward sloping concave function) given
by MRPL = MPPL x MRi, where subscript “L” stands for labour and subscript “i” stands for the good
which the laborer helps produce.
***In simpler terms, as your wage goes up, you might decide to work less because you prefer more free time over extra money (backward-bending labor supply curve). Your wage is the cost for your boss, and they decide how much to hire based on how much you contribute to the company’s profit (demand curve for labor). So, it’s a balancing act between what you want and what the company can afford.
The Value of Marginal Product of Labor (VMPL)
Value of Marginal Product of Labor (VMPL):
This is a way of figuring out how much value an extra unit of work (one more person working) adds to what a business produces. It’s calculated by multiplying the additional output (Marginal Product of Labor or MPPL) by the price of the product (Pi).
Marginal Revenue Product of Labor (MRPL):
This is when VMPL is equal to the wage (or the cost of hiring a worker). In a perfect competition scenario, where many buyers and sellers exist, this equality holds true. In simple terms, it means the value the worker adds is equal to what the business pays the worker. but otherwise VMPL > MRPL.
One important difference between labour and land, capital is that the latter two can be purchased but
labour can only be rented.
The Net Present Value (NPV) and Discounting
The NPV is like figuring out whether this purchase is a good idea or not. It looks at the value of all the future benefits (returns) you expect from that purchase, minus the costs, all adjusted to their current value.
So, NPV = (Value of future benefits) - (Costs), adjusted for the time value of money.
Discounting is the process of turning all those future benefits and costs into their current value. discount rate is like a tool we use to convert future values into present values. It’s a percentage that represents the value of having money today compared to having it in the future.
THE ECONOMICS OF INFORMATION PRODUCTS
The economics of information products or (internet products) involves studying how economic
principles apply to the production, distribution and consumption of these products. Information
economics or the economics of information is a branch of microeconomic theory that studies how
information affects an economy and economic decisions.
Experience goods
goods that people must get a flavor of before they can consider buying them. In
economics, an experience good is a product or service where product characteristics such as quality or
price are difficult to observe in advance, but these characteristics can be ascertained upon consumption.
