Micro 3.1.4 competition and concentrated markets Flashcards
define perfect competition
large number of small firms selling identical products
define monopoly
single firm supplies 100% of the market
define monopoly power
firm able to set a price of the product it sells
what is the difference between supernormal and subnormal profit
- supernormal - when profit is greater than normal profit
- subnormal profit - profit is less than normal profit
define barriers to entry
factors that make it difficult for a firm to join new markets
what are the differences of the key conditions between perfect competition, monopolistic competition and monopoly
- perfect competition - infinite number of producers, homogenous goods sold, no price maker, no marketing, non existent barriers to entry, has allocative efficiency and productive efficiency in the long run
- monopolistic competition - many producers, slight differentiated goods sold, no price makers, marketing is somewhat important, low barriers to entry, doesnt have allocative efficiency and productive efficency in the long run
- monopoly - 1 producer in market, has a price maker, marketing is important, high barriers to entry, doesnt have allocative efficiency and productive efficency in the long run
benefits of maximise profit
- shareholders are liekly to benefit from higher dividends (share of profit)
- employees may gain if some part of their pay is linked to profitbaility of the business
- Higher profits may lead to increased capital investment spending which will benefit other businesses in industries such as engineering and construction
define marginal revenue and marginal costs
- marginal revenue = change in total revenue when one more or one fewer unit of output is sold
- marginal costs = change in total cost when one more or one fewer of output is produced
when do firms maximise profit
link to MC and MR
whne MC = MR
* when a firm’s additional revenue from selling one more unit = their additional costs for producing that additional unit
- If MR < MC additional revenue could be gained by decreasing production.
- If MR > MC additional revenue could be gained by increasing production.
other objectives firms may focus on
except profit maximisation
- Survival - In competitive markets, staying afloat is paramount. Firms may prioritise cost-cutting measures and market adaptation to ensure long-term survival.
- Growth - Expanding market share and revenue can attract investors and secure future success. Firms may invest in marketing, acquisitions, or new product lines to fuel growth.
- Quality - Delivering high-quality products can build brand loyalty and customer satisfaction, leading to long-term benefits. Firms may invest in research and development and quality control processes to enhance product quality.
- Satisficing - Accepting “good enough” returns instead of relentlessly pursuing the absolute maximum profit.This approach balances profit with other objectives like employee well-being or environmental sustainability.
perfect competition diagram
long run
short run - supernormal an subnormal profit
outline all the conditions of a perfectly competitive market
- infinite buyers and sellers
- homogenous goods (firms are price takers)
- no bariers to entry/exit
- perfect information
- firms are profit maximisers (MC=MR)
monopoly diagram
outline the charactersitics of monopolies
- one firm domination - more than 25% of market
- differentiated products
- high barries to entry and exit
- imperfect information
- firm is profit maximiser
why does the AR curve on a monopoly diagram slope downards
they can charge whatever price they want
why is the MR curve steeper than the AR curve on a monopoly diagram
MR is pulled down by the AR but at a slower rate
MR is twice as steep
what are the 3 types of static efficiencies
- allocative - when price = MC
- productive - minimum point of AC curve
- X efficiency - produce above AC curve creates inefficiency
what are the 4 types of monopolies
- natural
- geographic
- government-created
- advertising
what are natural monopolies
special case where one large business supply the entire market at a lower long run AC contrasted with multiple providers
national grid
- one efficient player
- doesnt expeirecne economies of scale
what are geographical monopolies
in a specific geographical area, often occur in regions or localities
Anglian water or Greater anglian (railway)
- often emerge in isolated areas where competition is limited due to distance and low demand
- higher prices for consumers as monopolist has power to set price
- may result from government regulations grnating exclusive rights to a company
- lack of competition reduce incentive of monopolsit to improve products or service
what are government created monopolies
the government imposes restrictions or provideds businesses the sole right to produce and sell their products
NHS
government own the whole industry
what are advertising monopolies
firms get into position of having monopoly power via advertising
examples of high barriers to entry
- brand loyalty among customers
- patent protection ( innovation cant be made, used, distributed, imported or sold by others without consent)
- high cost of buying capital equipment
- need to win licences/franchises
difficult for new firms to enter a market
