Market structures Flashcards
Characteristics of perfect competition
- many small buyers and sellers
- no barriers to entry/ exit
- perfect information
- homogenous products
Why are perfectly competitive markets price takers
- they have low market power and low market share
At what point do perfectly competitive markers maximise profit
MC=MR
Where is a perfectly competitives market selling price
- selling price is is the same as the market price
- AR=D
What happens to perfectly competitive markets in the short run
- Firms make supernormal profit, this is because AC is below AR
What happens to perfectly competitive firms in the long run
- because SPN profit was being made in the SR, it attracted new firms to join the market and because theres no barriers to entry/exit they are free to do so
- supply then increases and shifts right & quantity in market increases from Q1 to Q2 and price falls
- firms now have to sell their products at the new market price which is lower and market share of the incumbent firm decreases, the firm is now producing where AR=AC, making NORMAL PROFIT
When does a perfectly competitive market make losses
- when AR is lower than AC
- when new firms enter the market, so marker share is being divided up between more competitors and some firms may start making a loss
Allocative efficiency for perfect competition
- allocatively efficient in LR & SR
- resources are allocated in a way as that benefits consumers and producers surplus
- no excess demand or supply
Productive efficiency in perfect competition
- point where AC is minimised
- where MC=AC
- there is no wastage of scarce resources & high level factor productivity
Cons of perfect competition
- lacks dynamic efficiency: left with normal profit, so no profit to reinvest in the company, no progress with technology or innovation
Characteristics of monopolistic competition
- differentiated products
- Low barriers to entry/exit
- large number of small buyers and sellers
- price makers due to different products
Example of monopolistic competitor in the short run
- barber shops as they may offer unique features such as free drinks or childcare while you wait
- this permits them to charge higher prices until such a point as competitors copy them and SPN profit is eroded away
What happens to monopolistic markets in the short run
- firms produce where MR=MC
- the firm is making SPN profit
- SPN profit is between AC and AR
What happens to monopolistic markets in the long run
- SPN profit is competed away, this is because there are low barriers to entry so new firms are attracted by the SPN profits and compete w/ incumbent firms
- SPN profits are competed away and make normal profit
What happens if monopolistic firms are making losses
- some will shut down based on the shut down rule, low barriers to exit so easy to leave
What type of competition do monopolistic markets use
- Non price competition
Examples of non price competition monopolistic markets use
- location : easily accessible or areas of high consumer traffic
- quality
