Mod 4 - Topic 1 - Perfect Competition & Monopoly Flashcards
What are the five features of perfect competition?
- Market power - None
- Buyers & Sellers - Lots who are relatively small
- Product - Standardised
- Market entry & exit - Very easy
- Non-price competition - not possible
What are four examples of perfect competition industries?
- Agricultural products
- Financial instruments
- Precious metals
- Petrol
What are the five features of a monopoly?
- Market power - absolute subject to govt regulation
- Buyers & Sellers - One firm (firm is the industry)
- Product - Unique (no close substitutes)
- Market entry & exit - Difficult or legally impossible
- Non-price competition - not necessary
What are three examples of monopoly industries?
- Pharmaceuticals
- Microsoft
- Gas station on the edge of a desert
What are five features of monopolistic competition?
- Market power - based on product differentiation
- Buyers & Sellers - large number of small firms acting independently
- Product - differentiated
- Market entry & exit - relatively easy
- Non-price competition - very important
What are three examples of monopolistic competition industries?
- Boutiques
- Restaurants
- Repair shops
What are the five features of an oligopoly?
- Market power - product differentiation and/or the firms dominance in the market)
- Buyers & Sellers - small number of large mutually independent firms
- Product - Differentiated or standardised
- Market entry & exit - difficult
- Non-price competition - Important
What are four examples of an Oligopoly industry?
- Oil refining
- Processed foods
- Airlines
- Internet access
What is market power?
It is the power to establish the market price
What is market structure?
It is the number and relative sizes of the buyers and sellers in a market
What is a price maker?
Firms that exercise market power through product differentiation or by being dominant players in their markets
What is a price taker?
Firms that operate in perfectly competitive markets.
Managers must make a business case for entering a perfectly competitive market based on what questions?
- How much should we produce?
- If we produce such an amount, how much profit will we earn?
- If we earn a loss rather than a profit, is it worthwhile to continue over the long-run or should we exit?
To determine the firms output decision in perfect competition, what economic assumptions must they have?
- They are a price taker (as it is perfectly competition)
- Distinction make between short and long run
- Objective is to maximise profit (or minimise loss) in the short run
- Opportunity cost (implicit) is factored in as part of its total cost of production to get total economic cost.
What is economic cost?
All cost incurred to attract resources into a company’s employ (includes explicit and implicit costs).
What is normal profit?
Amount of profit earned in a particular endeavour that is just equal tot he profit that could be earned in a firm’s next best alternative activity.
When a firm earns a normal profit what is it equivalent to?
The accounting cost and opportunity cost combined.
What is economic profit?
Total revenue minus total economic cost. The amount earned above what the firm could have earned in its next-best alternative.
What are two other names for economic profit?
- Abnormal profit
2. Above-normal profit
What is an economic loss?
Where a firm’s revenues cannot cover its account cost and opportunity cost.
As a price taker, what does the demand curve look like?
It is perfectly elastic (vertical) - which means customers are willing to buy as much as the firm is willing to sell at the going market price.
What is the total revenue / total cost approach?
Compares the total revenue and total cost schedules and finds the level of output that either maximises the firm’s profits or minimises their losses
What is the marginal revenue / marginal cost approach?
Aims to produce a level of output at which the additional revenue received from the last unit is equal to the additional cost of producing that unit (ie. MR = MC)
How is MR=MC restated in a perfectly competitive market?
P=MC because P=MR in the perfectly competitive market
For economic profit, where is the optimal level of quantity output?
The point where MR and MC cross, ie P=MR=MC.
Where the firm incurs a loss at optimum output the price is below average cost. How do you determine if the firm is worth continuing to produce in the short run?
IF the Price is still greater than AVC, as a firm will still incur its fixed costs.
What is contribution margin?
It is the amount by which total revenue exceeds total variable cost. Where contribution margin > 0 then the firm should continue to produce in the short run in order to defray some of the fixed cost. CM = TR-TVC
What is the shut down point?
The lowest rice at which the firm would still produce. At shutdown point P=minimum point of AVC
What happens if price falls below the shut down point?
Revenue fails to cover fixed and variable costs and the firm would e better off if it shut down and just paid its fixed costs.
Why in the long term will the price in a competitive market settle at the point where the firm earns a normal profit?
- Because economic profit invites entry of new firms, which shifts the supply curve to the right and puts downward pressure on price and therefore reduces profits
- And economic loss causes exit of firms, shifts the supply curve to the left, puts upward pressure on prices and therefore increases profits.
In a competitive market, is it more advantageous to be first into market and why?
Yes, because there are better chances of earning above normal profit - as new firms enter, they must find new ways to produce at the lowest cost.
If a firm in a competitive market firms unable to compete on the basis of cost have what option available?
Compete on the basis of product differentiation
What does the demand curve look like for a monopoly?
It is downward sloping because the firm is a price setter.
Where is the optimal level of output found?
Where MR = MC
