Market Structures Flashcards
What are the different types of competitive market structures
Perfect > Monopolistic > Oligopoly > Monopoly
What are “Normal Profits”
Normal profit is where TR=TC also where AR=AC (plot on diagram if needed)
What are “Abnormal Profits”
Abnormal profit is where Abnormal profit occurs when a firm’s total revenue exceeds its total costs.TR>TC (on diagram profit max)
How do you calculate Marginal Revenue and Costs
You calculate MR and MC by the change in revenue or Cost between output.
How do you calculate Average Revenue and Costs
You calculate average revenue and cost by dividing the revenue or cost by the number of output (units).
Define Economies of Scale
A change which causes the cost in the long run to fall.
Name 5 Economies Of scale
Financial economies of scale
Managerial economies of scale
Technical economies of scale
Marketing economies of scale
Purchasing Economies of scale
Name 2 Types of Diseconomies of Scale
Communication
Control
Define the law of diminishing returns
When one input of production is increased while the others stay the same which overtime can lead to decreased output.
What are the Characteristics of a Perfect Market
Large amount of small firms
Perfect consumer knowledge
Homogenous products
Small or No barriers to entry (contestable)
Customers are price takers have great options
Example Agriculture
What are the Characteristics of a Monopolistic Market
Products are differentiated from others through branding & marketing mix
Few barriers to entry
Relatively large numbers of small firms compete
Example restaurants
What are the Characteristics of a Oligopolistic Market
Sells identical or similar products
Most common type of market
Dominated by small number of large firms
Significant barriers to entry: high start-up costs, high advertising
Prices remain stable
Collusion between business to stop new entrants
Interdependent decision making
Example supermarkets
What are the Characteristics of a Monopoly Market
Only a single seller of a unique product
No competition the firm is the whole market
High barriers: high costs etc.
Potential abuse of the position
A firm with +25% market share is said to have monopoly power
Not contestable
Why Do Businesses Create Objectives for Stakeholders
Firms may have different objectives to satisfy stakeholders, as different stakeholders will have different objectives/wants
When businesses create objectives this may be for satisficing different stakeholders
What are the factors which affect business objective
How large is the business, how old is the business, structure of the business and also portfolio/product stage.
What are the main Objectives of a business
Profit Maximisation, Survival, Market Share and Community
Define Perfect Competition
Perfect competition is a market structure where many firms offer a homogeneous product.
Describe a Perfect competition Diagram (short run)
AR & MR is horizontal, MC is the lowest but curves up steeply to the top cutting through AC which dips down and rises like a “U”
How is Abnormal profits presented on a perfectly competitive diagram?
It runs below the AR and MR line and is from the point MC cuts through the MR line which then vertically below touches the AC line (box)
What does abnormal profit signal
If the firms are making Abnormal profits this will signal to other firms outside the market that there is high potential in the market which will encourage other firms to join, as there are 0 barriers to entry
How does an increase in firms affect the Market diagrams
An increase in firms will create an outward shift in market supply meaning profit falls, this then shifts the MR line down.
Describe the Perfect Competition Diagram ( Long Run)
AR & MR is horizontal, MC is the lowest but curves up steeply to the top cutting through AC which touches the MR line shallow “U” shape
Where is the Point of Profit maximisation in perfect long run
Point of profit maximization is at when MC meets with the demand line.
Define Monopolistic
Monopolistic competition is a type of imperfect competition such that there are many producers competing against each other, but selling products that are differentiated from one another.
Describe the demand curve in a monopolistic diagram
The demand curve is downward sloping as products are slightly different, the firm has a certain amount of market power (it can raise prices without losing all of its customers). However a large amount of firms producing close substitutes, the market power will be weak (elastic).
Describe the monopolistic competitive Diagram (short run)
The demand Line is downward Sloping AR line is above the MR line, MC curve starts below the AC curve but cuts through all the lines (steep), AC is a shallow “U”
Where is the Abnormal Profit made on a Monopolistic competitive Diagram (short run)
Abnormal profit made between AC and AR from the profit max point
Where is the profit maximisation Point on a Monopolistic Competitive Diagram
Profit maximisation point at MC + MR
Describe the monopolistic competitive Diagram (Long Run)
The demand Line is downward Sloping AR line is above the MRL line, The LRMC curve starts below the LRAC curve but cuts through all the lines (steep), While the LRAC curve is just touching the ARL curve.
What happens to the Diagram when Supply Increases
If supply increases, it would shift the ARL curve downwards.
Where do firms produce on a diagram
When MR=MC
Define two-firm concentration ratio
The Two-Firm Concentration Ratio is a measure used in economics to measure the market share of 2 firms compared to the rest of the market
What is the formula for concentration ratio
Market share of firm 1 + Market Share of Firm 2/ total market share x100
Explain price rigidity in oligopoly’s
where prices are relatively stable over time. Unlike perfect competition, where prices may adjust quickly in response to changes in supply and demand, oligopolistic firms are cautious about initiating price changes.
Define a price leader
A price leader is a firm that takes the initiative to set prices, and other firms in the industry often follow its lead.
Define non-price competition in oligopoly’s
where firms compete on factors other than price to gain a competitive advantage. This can include product differentiation, branding, advertising, innovation, and after-sales services. Non-price competition is a strategic response to the challenges of competing solely on price in a market where firms are interdependent.
Define kinked demand curve
The kinked demand curve is a theoretical concept used to explain observed pricing behaviour in certain oligopolistic markets. While it provides insights into why prices may remain relatively stable in such markets.
What is the problem with the kinked demand curve
Businesses do pass on their costs to their consumers. The theory also underestimates consumer loyalty
What is the impact of a price rise during a kinked demand curve
If a firm increases there price then it becomes more expensive than rivals, therefore consumers will switch to rivals.
Kinked demand curve creates very elastic prices so fall in demand
What is the impact of a price fall during a kinked demand curve
In the short run it would cause a big increase in demand
Other firms will eventually decrease the price
Meaning in the long run all firms is worse off
What are the advantages of an oligopoly for consumers
Competitive oligopoly can lead to price wars which can increase consumer surplus
Battle for higher market share leads to higher levels of R&D which improves efficiency
Use of economies of scale reduces prices
More product choice for consumers
What are the advantages of an oligopoly for firms
High barriers to entry protect existing firms in market
Price Stability
Economies of scale
What are the disadvantages of oligopoly’s for consumers
Stable prices if high
If high concentration ratio limits consumer choice
Cartel behaviour leads to higher prices
What are the disadvantages of oligopoly’s for firms
High Barriers to entry
When joining tactics can be used to pressure you out of the market
Define game theory
Game theory is concerned with predicting the outcome of games of strategy, in which the “players” (two or more businesses competing in a market) have incomplete information about the other’s intentions.
Define Nash equilibrium
where each player has nothing to gain by changing strategy, given the choices of the other player..
Define one-shot game
One shot game- means that the decision on whether to change strategy is made just once and doesn’t need to be considered what happens in the future.
Define dominant strategy
A dominant strategy is a business go to best option no matter what happens they still go for it.
Define Monopoly
A pure monopoly is when there is just 1 single seller, a monopoly can be classed when 1 firm in an industry has monopoly powers against other firms.
What are the barriers to entry of a monopoly
Economies of scale
Legal barriers such as patents (the right of invention)
Natural cost advantage (owner of all key sites in an industry)
Aggressive policies to make competitors leave the market (low prices)
Where does profit maximisation occur on a competitive diagram
MR=MC
What are the advantages of a monopoly
Economies of scale - lower average cost from increased scale
High profit can be used for R&D (dynamic efficient)
The reward of getting a patent can cause increased investment
Firms who become a monopoly may just become efficient and successful
What are the disadvantages of a monopoly
Higher prices for consumers
Less incentive to invest and innovate
Allocatively inefficient
Less choice for consumers
Define Price wars
Price wars are often short-lived and intense periods when competing businesses lower their prices in a bid to win extra market share, generate improved cash-flow and perhaps increase total revenues, one firm decides to make an aggressive move on rivals and undercut prices.
What is the CMA
The CMA is the UK’s primary competition and consumer authority. It is an independent department with responsibility for carrying out investigations into mergers, markets and the regulated industries and enforcing competition and consumer law.
What are the Y and X axis on a cost and revenue diagram
X axis - Output
Y axis - Costs and revenue (£)
What is DMR
Diminishing marginal returns, When MC starts to rise when MP or MR starts to fall
How do you calculate average fixed costs and total variable costs?
AFC = TFC/output
TVC = TC - TFC
Why do Monopolistic firms not make abnormal profits in the LR
In the short run they do but as barriers to entry are so low, it enables other firms to join the market lowering the market share so AR shifts left and make normal profit
