MARKETS Flashcards
What is meant by a “monopolistic market”
A single producer controls the whole supply of a single commodity which has no close substitutes.
The firm can charge whatever price they want for their products as there are no close substitutes for the products they provide.
What are the characteristics of the monopoly market?
- Maximising profits
- Price maker
- High barriers to entry
- Single seller
- No close substitutes
How does a monopoly firm make an economic profit?
When the firm sets output at a level where marginal cost equals marginal revenue the most profitable price for their goods can be identified.
MC = MR
The monopoly firm achieves an economic profit since the price charged will always be above the marginal cost
Define “economic profit”
Economic profit is the difference between the total revenue received by the firm from its sales and the total opportunity costs of all the resources used by the firm
Economic profit = total revenue - (explicit costs + implicit costs)
- Where explicit costs means direct costs
- Where implicit costs means opportunity costs, where no payment is actually made
Under perfect competition, how are prices determined?
The price is determined at the point where demand equals supply (equilibrium). This is because profit is maximised at this point.
At this point, price = average variable cost
If the price falls below the average variable cost, firms will shut down to minimise losses.
All firms in the perfect market are price takers, therefore they cannot control the market price of their product.
What are the characteristics of the perfect market?
- New firms can easily enter the market
- Companies earn just enough profit to stay in business and no more
- All firms sell an identical product
- All firms are price takers - they cannot control the market price of their product
- All firms have a relatively small market share
- Buyers have complete information about prices charged and the products being sold
Why do companies in the perfect market not charge higher prices to make excess profits?
Because if they were to earn excess profits, companies would enter the market offering cheaper alternatives and drive profits down to the bare minimum
How does real world competition differ from the textbook model of the “perfect market”?
- Real companies tried to make their products different to their competitors to achieve differentiation and USPs.
- Real companies advertise to gain market share
- Real companies cut prices to try and take customers away from other firms
- Real companies raise their prices to increase their profits
What are the ADVANTAGES of perfect competition for consumers?
- Consumer exploitation chance is very low since there is no pricing power within the firms so consumers can’t be charged a higher price than normal
- Consumers get standardised products (of the same quality) irrespective of the place of purchase
- Consumers cannot be displeased by the sellers, since the consumer will just shift to another firm if they are not satisfied by the sellers products or services
What are the DISADVANTAGES of perfect competition for consumers?
- Consumers don’t have much choice about the products they are buying since all firms sell identical products (no USP)
- Consumers can’t get cheaper alternative since all firms charge the same prices
- Consumers won’t benefit from product innovation since minimum profits will mean less expenditure for research and development
How does a monopoly firm determine their prices?
The firm sets output at a level where marginal cost equals marginal revenue, this allows them to achieve the most profitable price for their goods.
MC = MR
What are the ADVANTAGES of monopolistic competition for consumers?
- Monopoly avoids fake and duplicate products being sold
- Consumers can benefit from the monopoly’s achievement of economies of scale
- Monopoly’s can heavily invest in research and development making their products/ services better for their consumers
What are the DISADVANTAGES of monopolistic competition for consumers?
- Monopolies are best known for consumer exploitation, since there are no substitutes the consumer gets a bad deal in terms of quantity, quality and pricing
- Consumers may be charged high prices for low quality goods and services
- Lack of competition may lead to low quality and outdated goods
What is meant by “consumer surplus”?
Consumer surplus is the difference between the highest amount that consumers are willing and able to pay for a good or service (indicated by the demand curve) and the the market price
The difference, or surplus amount, is the benefit the consumer receives for purchasing the good in the market.
Low price elasticity of demand (inelastic goods) means a high level of consumer surplus
What is meant by “producer surplus”?
Producer surplus is the difference between the market price and the minimum amount the producer is willing to accept
The difference, or surplus amount, is the benefit the producer receives for selling the good in the market.
