market structures Flashcards
features of perfect competition
-many small firms
-homogenous goods
-all firms are price takers
-perfect knowledge
-freedom of entry and exit
-all factors of production are variable
what are the features of monopolistic competition?
-large numbers of buyers and sellers; all act independently; low concentration ratio
-in the LR, low/no barriers to entry
-firms produce differentiated/non homogeneous goods (competition is strong, many substitutes)
-producers have some control over price
-information is widely spread but not perfect
-in the SR, barriers are high (start up costs: technology -> trials/app development, R&D)
what are the features of oligopoly?
-few large firms
-firms must be interdependent
-high barriers to entry
-non price competition(due to sticky prices/price rigidity)
what are the features of a monopoly?
-only one firm
-complete barriers to entry
-firm is a price maker
why can’t a perfectly competitive firm earn supernormal profit?
-firm makes supernormal profit through lowering AC or innovation
-any supernormal profit means other firms are incentivised to enter (perfect knowledge)
-no barriers to entry
-D moves down to D1, due to a shift in supply (normal profit)
-creates a new market price
-firm is a price taker so it stays in the market
-at normal profit, no incentive to enter the market
why is demand perfectly elastic in a perfectly competitive firm?
-no demand at another price
-addition to the revenue is just another P
why does a monopolistically competitive firm make supernormal profits in the SR?
-the firm has some market power from product differentiation
(branding, quality)
-gives firm some price setting ability
-we assume that all firms are SR profit maximisers
(so Q occurs where MC = MR)
-AR > AC so SP is being earned
-in the SR, other firms may not offer close substitutes
-so firms can raise price & face less competition
-supernormal profit can be earned temporarily
why does the demand curve slope downwards in a monopolistically competitive firm?
-product differentiation means there is less price sensitivity
(PED is inelastic)
-so when price is raised, firm can still retain consumers
-consumers have brand loyalty so they are less likely to switch to substitutes
(because substitutes aren’t perfect)
why does a monopolistically competitive firm earn normal profits in the LR?
-information widely spread
-firms enter market and compete so supernormal profit is eroded away
