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A Level (A2) AQA Economics > Microeconomics part 3- Perfect Competition, Imperfectly Competitive Markets and Monopoly > Flashcards

Microeconomics part 3- Perfect Competition, Imperfectly Competitive Markets and Monopoly Flashcards

1
Q

What can market structures be determined by?

A
  • Barriers to entry
  • Homogeneity of the good
  • Number of firms
  • Market share
  • Price taker/maker
  • Perfect knowledge
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2
Q

What are features of a perfectly competitive market?

A
  • Price taker
  • Perfect knowledge
  • Homogeneous goods
  • Large number of firms and buyers
  • No barriers to entry and exit
  • Small market share
  • Factors of production are completely mobile
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3
Q

What is a real life example of the closest there is to a perfectly competitive market?

A
  • Currency exchange

- Gambling

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4
Q

What does the demand curve look like for a perfectly competitive firm?

A

Horizontal

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5
Q

What does D equal for a perfectly competitive firm?

A

D=P=AR=MR

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6
Q

What does the supply and demand diagram look like for the industry in which there are perfectly competitive firms?

A

Normal S and D

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7
Q

What do we assume about all firms?

A

They are all short run profit maximisers

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8
Q

Where do we assume firms produce if they are short run profit maximisers?

A

MC = MR

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9
Q

Why don’t perfectly competitive firms maximise revenue?

A

Because MR doesn’t equal 0

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10
Q

Do perfectly competitive firms maximise sales?

A

Yes, because AC = AR

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11
Q

Why don’t perfectly competitive firms innovate?

A

They have neither the means nor the incentive

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12
Q

What would happen if a short run profit maximiser innovated?

A
  • They would have to have supernormal profits
  • This would incentivise other firms to join the industry
  • In a perfectly competitive industry, the factors of production are completely mobile, so other firms will join the market
  • This causes supply to shift right so price will fall
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13
Q

Where do firms produce to maximise short run profits?

A

MC=MR

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14
Q

Where do firms produce to maximise sales?

A

AC=AR

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15
Q

Where do firms produce to maximise revenue?

A

MR=0

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16
Q

Where do firms produce to achieve allocative efficiency?

A

P=MC

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17
Q

Static efficiency definition:

A

Productive efficiency and allocative efficiency

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18
Q

What type of efficient are perfectly competitive firms?

A

Productively

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19
Q

Allocative efficiency definition:

A

Occurs when it is impossible to improve overall economic welfare by reallocating resources between markets. In the whole economy, price must equal marginal cost in every market

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20
Q

Why is allocative efficiency at P=MC?

A
  • Before P=MC, P is higher, so it is a signal to the firm that they should produce more as people value the good at more than it costs the firm to make them
  • After P=MC, it is a signal to the firm that they are producing too many and a rational firm would use those factors of production to make something else
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21
Q

Dynamic efficiency definition:

A

Efficiency over time- new products, techniques and processes which increase economic growth

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22
Q

What does dynamic efficiency require?

A
  • Innovation
  • R+D
  • Technology
  • Supernormal profit
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23
Q

Why is there no dynamic efficiency in perfectly competitive markets?

A

It requires supernormal profit

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24
Q

Why does P not reflect the true price of the good if there is an externality?

A

It does not take into account the externality so it is too high or too low. This means that the firm is not allocatively efficient because P does not reflect the true price of the good

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25
Q

What do we assume about all firms?

A

They are short run profit maximisers

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26
Q

Divorce of ownership and control definition:

A

The owners and those who manage the firm are different groups with different objectives. This only applies to large firms; PLCs

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27
Q

PLC definition:

A

Public Limited Company. Owned by shareholders who buy stocks on the stock exchange and receive dividends (shares of the profit)

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28
Q

What does the divorce of ownership and control lead to?

A

The principal agent problem

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29
Q

The principal agent problem definition:

A

The principal (owner) appoints an agent (director/manager) to perform tasks on his or her behalf, but the incentives of the owner may be different from those of the principal

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30
Q

What are methods of coping with the principal agent problem?

A
  • Employee share-ownership schemes (John Lewis)
  • Shareholder activism (Sainsbury’s)
  • Delist (Virgin)
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31
Q

Satisficing definition:

A

Achieving a satisfactory outcome rather than the best possible outcome

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32
Q

Sources of monopoly power:

A

High barriers to entry:

  • Natural barriers to entry:
    • Economies of scale
    • Natural barriers to entry e.g. high start up costs
    • High sunk costs
  • Artificial barriers to entry:
    • Patents
    • Product differentiation
    • Advertising and marketing
    • First mover advantage
    • Limit pricing
    • Predatory pricing
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33
Q

Features of a monopoly:

A
  • Only one firm
  • Complete barriers prevent the entry and exit of firms
  • Short run profit maximiser
  • Firm is a price maker
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34
Q

What does the demand curve look like for a monopoly?

A

Downwards sloping

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35
Q

What does D equal for a monopoly diagram?

A

D=P=AR

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36
Q

Where does MC go through?

A

Productive efficiency- the lowest point of AC

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37
Q

Where are supernormal profits on a monopoly diagram?

A

Above Q, from AC to P and then across to the axis

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38
Q

Why is MR falling in a monopoly diagram?

A

When the average is falling, the marginal must be below it

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39
Q

How do we know that monopoly firms are not productively efficient?

A

Q is not where AC is at its lowest point.

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40
Q

Why is a monopoly a short run profit maximiser?

A

Although it has the means for innovation, it does not have the incentive

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41
Q

How do we know monopoly firms are not allocatively efficient?

A

At Q, P does not equal MC

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42
Q

Why are monopoly firms not dynamically efficient?

A

Although they have the means for innovation, they do not have the incentive

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43
Q

Why will a nationalised monopoly produce at Q where P=MC?

A

This is allocative efficiency and the government will want to meet the needs and wants of the consumer

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44
Q

Where is the loss on a nationalised monopoly diagram?

A

D=LRMC up to LRAC and across to the axis

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45
Q

What do LRAC and LRMC look like on a nationalised monopoly diagram?

A

They are both curves that go down

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46
Q

In reality, where would a nationalised monopoly produce?

A

Somewhere between Q at MC=MR and Q at LRMC=P

This is because the firm will argue they need some supernormal profits for innovation etc

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47
Q

Who regulates how much nationalised monopolies can charge?

A

Regulatory bodies. This may lead to regulatory capture

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48
Q

Natural monopoly definition:

A

There is only room in a market for one firm. They never fully exploit economies of scale

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49
Q

What would happen if a monopoly decided to innovate?

A
  • AC and MC would rise
  • The new point of output would be to the left of the old one
  • Price would be higher
  • Supernormal profits would be lower
50
Q

X-inefficiency definition:

A

Occurs when a firm lacks the incentive to control cost (Banker’s bonuses). This is an example of the principal agent problem

51
Q

What is the diagram for x-inefficiency?

A

The point of output is floating above the AC curve

52
Q

Advantages of monopolies:

A
  • Benefit from economies of scale
  • Can theoretically pass on savings onto consumers
  • Means for dynamic efficiency
  • Makes sense in the case of natural monopolies so there is no duplication of resources
  • Internationally competitive
53
Q

Disadvantages of monopolies:

A
  • Restrict supply
  • Higher prices
  • Not productively efficient
  • Not allocatively efficient
  • No incentive for dynamic efficiency
  • Misallocation of resources
  • Underconsumption of the good
  • Inequality
  • Loss of consumer welfare/ surplus
  • May satisfice rather than maximise profit
  • X-inefficient
  • Lack of choice
54
Q

Consumer surplus definition:

A

A measure of the economic welfare enjoyed by consumers; surplus utility received over and above the price paid for a good

55
Q

Producer surplus definition:

A

A measure of the economic welfare enjoyed by firms or producers; the difference between the price a firm succeeds in charging and the minimum price it would be prepared to accept

56
Q

How to draw welfare loss/ gain on a diagram:

A

Draw a line straight up from the equilibrium then make a triangle

57
Q

Deadweight loss definition:

A

The name given to the loss of economic welfare when the maximum attainable level of total welfare is not achieved

58
Q

Price discrimination definition:

A

Charging different prices to different customers for the same product or service, with prices based on different willingness to pay

59
Q

Conditions necessary for price discrimination:

A
  • Must be able to identify different groups of customers easily
  • Different customers must have different price elasticities of demand
  • Markets must be able to prevent resale
  • Needs to be a monopoly
60
Q

Methods of price discrimination:

A
  • Geographical
  • Time
  • Age of customer
  • Quantity bought
61
Q

First degree/ perfect price discrimination definition:

A

When the discriminating firm can charge a different price to each individual customer e.g. car insurance

62
Q

Why is there no consumer surplus for first degree price discrimination?

A

Everyone is charged the most they are willing to pay

63
Q

Why is producer surplus maximised for first degree price discrimination?

A

The firm makes the most profit possible for each customer

64
Q

What is the diagram for first degree price discrimination??

A
  • 2 diagrams
  • Differently sloped demand curves (and MR curves)
  • Constant MC
  • Same Q so different P
65
Q

Second degree price discrimination definition:

A

Charging a different price for different quantities, such as quantity discounts for bulk purchases

66
Q

What is the amount of producer and consumer surplus for second degree price discrimination:

A
  • More consumer surplus than first degree
  • Less producer surplus than first degree
  • Trade off between producer and consumer surplus
67
Q

Diagram for second degree price discrimination:

A
  • Normal demand curve
  • Different MC and AC curves at each Q
  • The assumption is that bulk purchases generally have lower average costs of production
68
Q

Third degree price discrimination definition:

A

When the discriminating firm can charge a separate price to different groups of customers

69
Q

What is the diagram for third degree price discrimination?

A

Same as first degree

70
Q

What is the amount of producer and consumer surplus for third degree price discrimination:

A
  • More consumer surplus than second degree
  • Less producer surplus than second degree
  • Trade off between producer and consumer surplus
71
Q

Advantages of price discrimination:

A
  • Producer surplus increases; maximised when first degree
  • Could be equitable
  • Profit maximising as prices match characteristics of the market
  • Can increase sales which may lead to economies of scale
  • Lower prices for some consumers
72
Q

Disadvantages of price discrimination:

A
  • Consumer surplus decreases; disappears when first degree
  • Could be unequal (bad for rich)
  • May be costly to prevent resale (why firms choose not to do it)
73
Q

Oligopoly definition:

A

Where a few large firms have the majority of the market share

74
Q

Features of an oligopoly:

A
  • Supply in the industry concentrated in the hands of relatively few firms
  • Firms must be interdependent
  • High barriers to entry
  • Non price competition
75
Q

Concentration ratio definition:

A

The proportion of the market share held by the dominant firms

76
Q

What type of prices do oligopolies experience?

A

Sticky prices/ price rigidity at the kink in the demand curve

77
Q

Why do oligopoly firms not have a higher output?

A

They would have to lower their prices by a higher proportion than the revenue gained from extra sales (price inelastic)

78
Q

Why do oligopolies not increase prices?

A

All their customers would go to other firms (price elastic

79
Q

Does an oligopoly maximise revenue (assuming short run profit maximisation)?

A

No because MR does not equal 0

80
Q

Why do we not know if an oligopoly minimises costs or maximises sales?

A

No AC curve

81
Q

Examples of non-price competition:

A
  • Better quality of service
  • Longer opening hours
  • Extended warranties
  • Discounts on product upgrades
  • CSR
  • Product differentiation
  • USP
82
Q

Weaknesses with the kinked demand curve:

A
  • Where did the price come from?
  • Ignores effects of non-price competition
  • Behavioural economics (anchoring, brand loyalty etc.)
  • Assumes a particular reaction by other firms to a change in the price of a firm’s product
  • Few economists now accept the kinked demnd curve
83
Q

When is there the means or incentive for innovation in an oligopoly?

A
  • At low MC curves there is the means but not the incentive

- At high MC curves, there is the incentive but not the means

84
Q

Interdependence definition:

A

The actions of one firm will have an effect on the sales and revenue of other large firms in the market

85
Q

Collusion definition:

A

Where firms cooperate in their pricing, marketing, R&D and/ or output policies. It is an attempt by firms to recognise their interdependence and act together rather than to compete. It is illegal.

86
Q

Cartel definition:

A

A collusive, formal, agreement by firms, usually to fix prices. Sometimes there is also an agreement to restrict output and to deter the entry of new firms

87
Q

Why does collusion hardly ever happen?

A

Because it doesn’t work because it is inherently unstabe

88
Q

Price leadership definition:

A

The setting of prices in a market, usually by a dominant firm, which is then followed by other firms in the same market

89
Q

Overt collusion definition:

A

Collusion in full public view that is desirable. For example, R+D by car manufacturers. Individual firms wouldn’t have the money to do that research but it could improve safety so is for the public’s benefit

90
Q

Types of formal collusion:

A
  • Restrictive agreements (when firms refuse to sell to outlets who sell below the agreed price)
  • Price fixing
  • Dividing the market by area (e.g. not putting supermarkets close)
  • Predatory pricing
  • Cartels
91
Q

Informal collusion types:

A
  • Price leader
  • Parallel pricing
  • Tacit collusion- an understanding without explicit agreement between firms
92
Q

Problems facing cartels/ collusion:

A
  • An agreement has to be reached
  • Cheating has to be prevented
  • Potential competition must be restricted
  • Legislation
93
Q

Advantages of oligopolies:

A
  • Stable prices good for consumers, businesses, inflation
  • Market cooperation can lead to improved health and safety, R+D (rare)
  • Firms may have means for dynamic efficiency
94
Q

Disadvantages of oligopolies:

A
  • No sales (reduction of price)
  • There could be collusion
  • Concentration ratio
  • Firms may not have the incentive for dynamic efficiency
  • Firms are interdependent. Revenues may rise or fall through no action of their own
95
Q

What diagram should be drawn if there is collusion?

A

Monopoly

96
Q

Monopolistic competition definition:

A

A market structure in which firms have many competitors, but each one sells a slightly different product

97
Q

Features of monopolistic competition:

A
  • Large number of buyers and sellers; all act independently, low concentration ratio
  • In the long run, there are no/low barriers to entry or exit. (You don’t need the initial design)
  • Firms produce differentiated, non-homogeneous goods; competition is strong, plenty of switching takes place
  • Producers have some control over price
  • Information is widely spread but not perfect
98
Q

Similarities between monopolistic competition and perfect competition:

A
  • Large number of firms

- In the long run, there are no(/low) barriers to entry

99
Q

Similarities between monopolistic competition and monopoly:

A
  • Some price making ability, especially in the short run
  • Supernormal profit in short run
  • Restriction of supply, even in long run
100
Q

What is the diagram for monopolistic competition like in the short run?

A

Monopoloy diagram

101
Q

What happens to the diagram for monopolistic competition like in the long run?

A
  • The demand curve flattens because more firms enter the market
  • The lowest point of the AC curve hits the demand curve
102
Q

What type of profit do monopolistically competitive firms make?

A
  • In the short run they make supernormal profits
  • In the long run they just make normal profts
    e. g. deliveroo
103
Q

Efficiencies for monopolistic competition in the long run:

A
  • Not productively efficient
  • Not allocatively efficient
  • Not dynamically efficient, has the incentive for innovation but not the means
104
Q

Efficiencies for monopolistic competition in the short run:

A

Same as monopoly:

  • Not productively efficient
  • Not allocatively effient
  • Means and potentially the incentive for innovation, aware that there is the potential for competition. They want to innovate to maintain monopoly power
105
Q

When with monopolistic competition might there be the divorce of ownership and control?

A

The short run. Shareholders will just want them to maximise short run profits and not innovate

106
Q

What does monopolistically competitive markets having dynamically efficiency depend upon?

A

The size of the business and whether or not they think they will continue to be the biggest in the market

107
Q

Where do monopolistically competitive firms produce at in the long run?

A

At Q where AC=AR, sales maximisation

108
Q

Advantages of monopolistic competition:

A
  • No significant barriers to entry in the long run, therefore markets are relatively contestable
  • High level of promotion, informative, low search costs
  • Differentiation creates diversity, choice and utility
109
Q

Disadvantages of monopolistic competition:

A
  • Some differentiation does not create utility but generates unnecessary waste
  • Inefficient, leads to dead weight loss
  • Economies of scale not maximised
110
Q

Contestable market definition:

A

Where there is free entry and exit of other firms

111
Q

What is the theory of contestable markets?

A

That what matters is the absence of barriers to entry and the level of sunk costs

112
Q

Features of contestable markets:

A
  • Number of firms in the industry varies from few to many, with no single firm having significant market share
  • Freedom of entry and exit to the market
  • Firms compete with each other and do not collude to fix prices
  • Firms may produce homogeneous goods or they may produce branded goods
  • There is perfect knowledge in the industry
113
Q

What happens to encourage contestability?

A

Barriers to entry are lowered

114
Q

Ways to encourage contestability?

A
  • Deregulation (e.g. post, taxis)
  • Tougher laws against anti competitiveness
  • Reduce patents
  • Subsidise smaller firms
115
Q

Evaluation of deregulation of firms

A

Difficult to deregulate some monopolies e.g. water or gas

116
Q

Evaluation of laws against anti competitiveness?

A

Some firms find these laws will restrict their long run success

117
Q

Evaluation against subsidising smaller firms::

A

Unpopular

118
Q

What to do with competition causes markets to become more contestable?

A

The THREAT of increased competition

119
Q

What does reducing the barriers to entry do to a firm with monopoly power?

A

Encourages it to act like it is in a more competitive market. The threat is real as long as the barriers remain low

120
Q

Hit and run entry definition:

A

Where new firms enter the industry where barriers to entry are low, gain lots of supernormal profits, and then leave the market

121
Q

What types of markets can be efficient as long as they are contestable?

A

All except natural monopolies

122
Q

What is the diagram for a contestable market and why does a firm produce here?

A
  • Monopoly diagram with output at Q where AC=AR (sales maximisation)
  • This is beyond allocative efficiency and there are no supernormal profits to be made
  • It produces here because if there are no supernormal profits, it won’t attract other firms into the market
  • In reality, it would actually produce somewhere between here and MC=MR (free market), because there would be some level of brand loyalty etc. so it doesn’t need to lose all supernormal profits completely

A Level (A2) AQA Economics (10 decks)

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