Market structures and Monop Comp Flashcards
What do Market Structures depend on
Market structures depend on the number of firms in the market, their ability to enter and exit the market freely and the degree of prodcut differentiation. Regulators can affect the degree of contestability in a market in order to protect consumers and maximise welfare.
Barriers to entry
- Economies of scale
- Brand loyalty, demand for a product is more inelastic and it is harder for new firms to gain consumer loyalty.
- Having a strong repuation
- Firms controling supply through verticle intergration, this makes it hard for new firms to compete on price as other firms have control on the price they pay to their suppliers.
- Regulation and high start up costs.
- Agreesive pricing strategies
Buisness Objectives
- Profit Maximisation
- Revenue Maximisation
- Growing Market share
- Survival
- Social and community objectives
Buisness Objectives - Profit MAX
- Profit is the difference between a firms total revenue and a firms total costs, a firm is operating at profit max when they are operating at a price and output that derives the greatest profit.
Marginal cost = Marginal revenue. Each extra unit produced of the good gives no extra loss or no extra gain in revenue.
Why do firms want to maximise profits?
- Boosting welfare for shareholders, dividens and wages for shareholders rise as profits increase.
- In the short run the interests of the owners or shareholders are most importnant since they aim to maximise their gain.
- Large profits can be reinvested back into the product, in order to improve quality, quantity etc. of the product in the future and possibly lead to even greater profits.
- Firm can build savings and then help them survive economic downturn or recession.
Buisness Objectives - Revenue MAX
Revenue maximisation occurs when MR=0, on other words each extra unit sold of the good generates no extra revenue.
- Pusuring revenue max may be a way to increase long-term profitability, by gaining market share, enable economies of scale, greater sales, increasing brand loyality and therefore in the future they will have a greater consumer base and more price setting ability.
Buisness Objectives - Sales MAX
This is not the same as revenue max, instead firms aim to sell as much of their goods and services as possible, but without making a loss. This is where average revenue = average costs, or AR = AC.
This would aim to increase long term profitability, increasing market share and sacraficing current profits. In the long run the firm could have a wider consumer base and more control over prices.
Utility Maximisation
This is when consumers look to gain the greatest utility possible from a economic decision, whilst firms aim to generate the highest profits possible, a consumers utiltity is the total satisifaction recieved from consuming a good.
Buisness Objectives - Profit Satisficing
Shareholders want profits since they earn dividends from them. Managers might not aim for high profits, because their personal reward from them is small compared to shareholders. Therefore, managers might choose to earn enough profits to keep shareholders happy, whist still meeting their other objectives.
Buisness Objectives - Social and community objectives
A firm may not be motivated by money but may seek to help the local community, they may look to help the enviroment and promote ethical policies.
They may also try and cultivate theri corporate image and their brand, maybe to increase future profits but possibly to promote other social goals.
Monoplositic Competition definition
This is a market structure that combines elements of a monoploy and competitive markets, there are freedom of entry and exit barriers, firms can differentiate their products. Their demand curve is downward sloping and they have some price setting ability. However because of freedom of exit and entry, supernormal profits will mean more firms enter the market and therefore there will be normal profits in the long term.
Features of a Monoplosistic competition market
- Many firm and a low market concentration, this means there is limited price setting ability due to the subsitutes that are available.
- Freedom of entry and exit barriers, relatively low start up costs and limited legal restrictions. No dominant firm in the market.
- Firms CAN produce differentiated products, too some extent, for example restaurants can differ in food and quality.
- Downward sloping demand curves, they are price makers to some defree because they are likely able to differentiate their products.
- They make supernormal profits in the short run but in the long run they make normal profits.
Monop Comp in the long and short run with DIAGRAM
- In the short run the firm will maximise profits as MC = MR, this means they are making supernormal profits, shown as the distance between Ppm and CpuPm.
- In the long run although the firm encourages new firms to enter the market due to their super normal profits and the fact that there are no entry or exit barriers. This reduces the demand for the exisiting firms product and therefore the AR curve shifts inwards and due to the increasing number of subsitutes, the firms AR is more elastic. They no longer make supernormal profits.
Allocative efficiency in monopolisitc competition
MC = AR or MC = PRICE
- Firm operates at MC=MR so allocative efficiency is not met in this market, firms have some price setting ability, this results in a welfare loss in both the short run and the long run.
- BUT this is more efficient than monoply or oligoploy markets due to the competitive pressures, pushing prices down, consumer welfare is likely larger in this market.
Productive efficiency in a monopolistic competition
ATC=MC
- Firms have price setting ability and the AR slopes downwards, this means they operate at MC=MR, both in the short and long run.
BUT in the long run there are high competitive pressures meaning there is unlikely to be x ineficiency
