Market Structures Flashcards
At what price can firms in perfect competition sell at?
The market price, this will remain the same regardless of the output of an individual firm. Demand = AR = MR, the demand curve is horizontal
What is supernormal profit?
A temporary period where a firm makes profit which exceeds total cost
Why is supernormal profit only temporary?
Due to free info, firms will enter the market to take advantage of supernormal profits thereby shifting supply right. Prices will then fall until supernormal profit has ceased and the market will be back to where ATC are at a minimum and MR cuts MC
What would cause a business to close?
If it were operating below its average variable costs!
A business may be operating above its AVC but below its total cost in the short run but not in the long run
What is monopoly?
A market where only one supplier exists
What are the characteristics of a monopoly?
- price maker
- the point where MR = MC is above ATV meaning a monopoly can maintain supernormal profits
- there is no supply curve, just a single point at which they are prepared to supply. This point will always be on the elastic part of the demand curve, as only then would marginal revenue be positive.
What factors may lead to an ongoing monopoly?
- Legal Protection through patent rights
- a natural monopoly - e.g. Had monopoly through patent rights but after this ends no other firms would be able to compete with their lower costs
What is integration?
Where a monopoly uses supernormal profits generated to acquire other businesses that are part of the productive chain and thereby prevent anyone else from entering the market
What does a comparison of monopoly and perfect competition conclude?
In perfect competition, firms operate at the point of lowest total costs.
Whereas monopolies represent inefficiency the price of which will be paid by the consumers. However, this argument ignores the fact that because of their size, monopolies may be able to command a lower overall cost and whilst making supernormal profits, may actually provide consumers with a lower price
What is the consumer surplus?
When the first good someone buys have them a greater level of satisfaction that they were prepared to pay a higher price. Monopolies take advantage of this through price discrimination
What is perfect price discrimination?
Where each customer is charged a different price. In this case MR and price will be identical, as the overall price will not fall for all items if an additional unit is sold
What is Monopolistic competition?
Where there are a number of competing firms with varying degrees of product differentiation but no barriers to entry
What is an oligopoly?
Where there are only a few competing producers acting as a collective monopoly with significant barriers to entry
Explain monopolistic competition?
A monopoly loses its ability to prevent other entering the market. New entrants emerge and take the supernormal profit levels. As products are differentiated each firms faces a downward sloping demand curve. Competition will take place in non price methods such as improving products and advertising. This will shift the demand curve right for a time enabling supernormal profits until new firms enter the market and the process repeats itself.
What characterises an oligopoly?
Small number of firms who collude in the price setting process
Significant barriers to entry
Collusion
Price fixing
Competition take place through branding, product differentiation and advertising.
