Market structures Flashcards
What are the conditions of perfect competition
- Many buyers and sellers
- Homogenous goods
- No barriers to entry/exit
- perfect information
-Firms are profit maximisers
What profits are firms in perfect competition producing (long run)
Normal profits
What are the efficiencies of perfect competition
- Allocative
- X
- Productive
Why are firms in perfect competition not dynamically efficient
Firms are not producing supernormal profits, therefor can not reinvest profits. (little innovation)
Draw a diagram to show a firm in perfect competition (LR)
What are barriers to entry
Characteristic of a market that prevents new firms from readily joining the market
What is a price taker
Firm that must accept whatever price is set in the market as a whole
What are the conditions of monopolistic competition
- Many buyers and sellers
- Slightly differentiated good
- Firms are price makers
- Price elastic Demand
- Low barriers to entry/exit
- Good information
- Non price competition
- Firms are profit maximisers
Name some examples of industries with monopolistic competition
Bars, hairdressers, salons
Draw a firm in monopolistic competition - SR
Draw a firm in monopolistic competition - LR
Efficiencies in monopolistic competition
Not allocative
Not productive
Not dynamic
Benefits of monopolistic competition
Less price exploitation
Consumers have more choice
What are the characteristics of an oligopoly
- High barriers to entry/exit
- High concentration ratio (few dominant firms)
- Interdependence of firms
- Product differentiation
What is a competitive oligpoly
Firms using price/non price competition
What is a collusive oligopoly
Occurs when firms agree to work together eg. price fixing or restricting output
Factors promoting competitive oligpoly
- Large number of firms (less concentrated)
- One firm has a cost advantage.
- New market entry possible
- Homogenous goods
Factors promoting a collusive oligopoly
- Small number of firms (higher concentration)
- Similar costs
- Product differentiation
- Consumer loyalty
Draw a kinked Demand curve (oligpoly)
What is a cartel
An agreement between firms on price and output with the intention of maximising their joint profits
Overt collusion
A situation in which firms openly work together to agree on prices or market shares
Tacit collusion
Situation occurring when firms refrain from competing on price, but without communication or formal agreement
Non price competition
Steps that firms can take to compete with rival firms other then on price eg. advertising or product differentiation
