MODULE 6: MARKET STRUCTURES Flashcards
CHARACTERISTICS OF PERFECT COMPETITION
- Many buyers and many sellers
- The goods offered for sale are largely the same.
- Firms can freely enter or exit the market.
PRICE TAKERS
take the price as given.
GENERAL RULE FOR PROFIT MAXIMIZATION:
- If marginal revenue is greater than marginal cost, the firm should increase its output.
- If marginal cost is greater than marginal revenue, the firm should decrease its output.
- At the profit-maximizing level of output, marginal revenue and marginal cost are exactly equal.
MC curve is the firm’s ____
supply curve
a cost that has already been committed and cannot be recovered
SUNK COST
If firm exits the market
- revenue falls by TR
- costs fall by TC
(the firm should exit if TR < TC. Divide both sides by Q)
____ is a sunk cost: The firm must pay its fixed costs whether it produces or shuts down. So it should not matter in the decision to shut down.
FC
if P < ATC
Exit
TR > TC (Divide both sides by Q to P > ATC)
In the long run, a new firm will enter the market if it is profitable to do so
As long as price is above average variable cost, each firm’s _____ curve is its supply curve.
marginal-cost
Zero economic profit occurs when
P = ATC
Since firms produce where P = MR = MC, the zero-profit condition is _______.
P = MC = ATC
Profit-maximization
MC = MR
Perfect competition
P = MR
in the competitive eq’m
P = MC
MC is cost of producing the ______
marginal unit
the value to buyers of the marginal unit.
P
a firm that is the sole seller of a product without close substitutes.
monopoly
A ____ firm has market power, the ability to influence the market price of the product it sells.
monopoly
A _____ firm has no market power.
competitive
The main cause of monopolies are other firms cannot enter the market.
barriers to entry
Three sources of barriers to entry
- A single firm owns a key resource.
- The govt gives a single firm the exclusive right to produce the good.
- Natural monopoly: a single firm can produce the entire market Q at lower ATC than could several firms.
a single firm can produce the entire market Q at lower ATC than could several firms.
Natural monopoly
a firm can increase Q without lowering P, so MR=P for the competitive firm
Competitive firm’s demand curve
to sell larger Q, the firm must reduce P. Thus, MR≠P
Monopolist’s demand curve
Increasing Q has two effects on revenue
- The output effect-More output is sold, which raises revenue
- The price effect- The price falls, which lowers revenue
To sell a larger Q, the monopolist must ______ it sells. Hence, MR < P
reduce the price on all the units
A monopoly maximizes profit by choosing the quantity at which ___ equals ____(point A). It then uses the demand curve to find the price that will induce consumers to buy that quantity (point B).
marginal revenue, marginal cost
For a competitive firm in profit maximization
P=MR=MC
For a monopoly firm
P> MR= MC
As with a competitive firm, the monopolist’s profit equals
(P – ATC) x Q
is a “price-maker,” not a “price-taker”. Q does not depend on P; rather, Q and P are jointly determined by MC, MR, and the demand curve.
So there is no supply curve for monopoly.
monopoly firm
there is no supply curve for
monopoly
Competitive eq’m
quantity = QE
P = MC
total surplus is maximized
quantity = QM
P > MC
deadweight loss
Monopoly eq’m
the business practice of selling the same good at different prices to different buyers.
Price discrimination
The characteristic used in price discrimination is
willingness to pay (WTP)
A firm can increase profit by charging a higher price to buyers with higher
WTP
describes a situation in which the monopolist knows exactly each customer’s willingness to pay and can charge each customer a different price.
Perfect price discrimination
Without _____, a firm produces an output level that is lower than the socially efficient level.
price discrimination
Limitation of price discrimination
Arbitrage
the process of buying a good in one market at a low price and then selling it in another market at a higher price will limit a monopolist’s ability to price discriminate.
Arbitrage
PUBLIC POLICY TOWARDS MONOPOLIES
- Increasing competition with antitrust laws
- Regulations
- Public ownership
- Doing nothing
In the real world, pure monopoly is rare. Yet, many firms have market power, due to
- selling a unique variety of a product
- having a large market share and few significant competitors
It is a market structure in which many firms sell products that are similar but not identical.
MONOPOLITIC COMPETITION
it does not only talks about the physical apperance of the product but also its location.
PRODUCT DIFFERENTIATION
in the short run, it will act as if it’s a ____. However, in the long run, they will act as if they are in a _____.
monopolist, perfectly competitive market structure
CHARACTERISTIC OF PERFECT COMPETITION
- You have a lot of buyers and sellers
- pre entry and pre-exit where you define your demand curve as horizontal
- your price is equal (=) to your MR=MC which is also equal to your AR
you don’t have a supply curve, you only have your MR and your demand curve.
MONOPOLIST
To determine the ______, you need to establish your MR and your demand curve because your demand cruve will tell you how much the consumer is willing to purchase given your price and that’s a good starting point for you to predict that this will be my market price.
monopolist price
Your demand in the short run resembles your _____and your demand curve is not your market demand but your_____.
monopolist curve, residual demand
those customers who are not able to purchase in the previous market goes to you. In other words, it is not your market demand.
Residual Demand
the demand by the customers who were not catered by other firms and they decided to transfer to you. In other words, leftovers. (it is not your demand curve. It is your individual firm demand curve.)
RESIDUAL DEMAND
- Price is always greater than your total cost.
- The firm faces a downward-sloping D curve. At each Q, MR < P. (UNDER MONOPOLY)
A MONOPOLISTICALLY COMPETITIVE FIRM EARNING PROFITS IN THE SHORT RUN
- To maximize profit, firm produces Q where MR=MC but not the Price.
- The firm uses the D curve to set P.
A MONOPOLISTICALLY COMPETITIVE FIRM EARNING PROFITS IN THE SHORT RUN
P < ATC at the output where MR=MC. The best this firm can do is to minimize its losses through product differentiation. (UNDER MONOPOLY)
A MONOPOLISTICALLY COMPETITIVE FIRM WITH LOSSES IN THE SHORT RUN
you can have strategies in terms of innovating your product to catch more attention and attract more customers
product differentiation
in which run is under monopolistic competition, firm behavior is very similar to monopoly.
Short run
in monopolistic competition, entry snd exit drive economic profit to zero.
Long run
Entry and exit occurs until
P=ATC and
Profit=zero
an additional price that they set.
markup price
the monopolistic competitor operates on the downward-sloping part of its ATC curve, produces less than cot-minimizing output.
EXCESS CAPACITY
In the _____, firms in perfect competition produce at the lowest point of their Average Total Cost (ATC) curve. This point ensures productive efficiency, meaning firms are operating at the most cost-effective output level. Additionally, price equals marginal cost (P = MC) in perfect competition, ensuring allocative efficiency, where resources are optimally distributed to meet societal needs.
long run
this does not produce at the lowest point of its ATC curve because: Downward-Sloping Demand Curve: Due to product differentiation, each firm faces a downward-sloping demand curve. As a result, it operates where Price > Marginal Cost (P > MC), meaning there’s a markup over cost.
MONOPOLISTIC COMPETITION
The firm operates on the downward-sloping part of the ATC curve, above its minimum point. This occurs because, to maximize profits, the firm produces a lower output level than what would minimize ATC. In simpler terms, the firm underutilizes its productive capacity. The output is less than the socially efficient quantity, which would occur if firms produced at the minimum ATC point (as in perfect competition).
Excess Capacity
In _____, firms operate at the very bottom of this U, where production is maximized, and costs are minimized. In ______, firms operate somewhere up the slope of the U, to the left of the lowest point. This position indicates that they are producing less output than what would minimize their costs, hence the term excess capacity.
perfect competition, monopolistic competition
under monopolistic competition, P > MC.
Under perfect competition, P=MC.
MARKUP OVER MARGINAL COST
If you are in a _____, your price will always be greater than your marginal cost (MC). This is because of the markup price, which allows you to add an additional amount to the current price level to generate profit.
monopolistic competition
in _____, the price is equal to the marginal cost (P = MC). The concept of efficiency, therefore, leans toward benefiting society through social efficiency.
perfect competition
THIS MARKET do not have all the desirable welfare properties of perfectly competitive markets.
* Because P > MC, the market quantity is below the socially efficient quantity.
* Yet, not easy for policymakers to fix this problem: firms earn zero profits, so cannot require them to reduce prices.
Monopolistically competitive markets
One key characteristic why Monopolistically competitive markets do not possess all the desirable welfare properties of perfectly competitive markets
the price is greater than the marginal cost (MC). This means the market quantity is below the socially efficient quantity.
In _____, firms in monopolistic competition earn zero economic profits. As a result, they cannot be required to reduce their prices further. Markup pricing is therefore justified in this context.
the long run
When the price equals marginal cost (P = MC) and the firm operates at the lowest possible point on the ATC curve, the firm is in a _____. The only way to escape this condition is if there is an increase in demand. This increase in demand will drive up prices temporarily, but as supply adjusts, the market will eventually return to the ____.
zero-profit condition
Number of firms in the market may not be optional, due to external effects from the entry of new firms
one of the reason why Monopolistically competitive markets do not have all the desirable welfare properties of perfectly competitive markets.
consumers surplus from the introduction of new products.
- The productive-variety externality
losses incurred by existing firms when new firms enter market.
business-stealing externality
this refers to an outcome resulting from a transaction between two economic agents that affects a third party. These effects can be positive (beneficial) or negative (harmful), depending on the circumstances.
externality
In monopolistically competitive industries, product differentiation and markup pricing naturally lead to the use of _____. The more differentiated a product is, the greater the need for firms to _____.
advertising/advertise
When products are highly differentiated, there are many similar varieties available in the market. To stand out, firms must champion their product over competitors, highlighting its unique features and benefits. ___ becomes a tool to gain an edge in a crowded market.
Advertising
are divided on whether advertising is beneficial or detrimental to society.
Economists
Critics of Advertising
- Manipulation of Consumer Preferences
- Impeding Competition
Critics argue that advertising manipulates consumers into wanting things they don’t necessarily need.
It can create artificial desires rather than meeting genuine needs.
Manipulation of Consumer Preferences
Advertising can create the illusion that products are more differentiated than they truly are.
This perception allows firms to charge higher markups by convincing consumers that their product is “the best,” even when it may not be significantly better than alternatives.
Impeding Competition
Critics of Advertising Believe
- Firms advertise to manipulate people’s tastes.
- Advertising impedes competition by creating the perception that products are more differentiated than they really are, allowing higher markups.
The Defense of Advertising:
- It provides useful information to buyers.
- Informed buyers can more easily find and exploit price differences.
- Thus, advertising promotes competition and reduces market power.
A firm’s willingness to spend huge amounts on advertising may signal the quality of its product to consumers, regardless of the content of ads.
Advertising as a Signal of Quality
Firms with usually spend more on advertising and charge higher prices for their products.
brand names
Critics of brand names believe
- Brand names cause consumers to perceive differences that do not really exist.
- Consumers’ willingness to pay more for brand names is irrational, fostered by advertising.
- Eliminating government protection of trademarks would reduce the influence of brand names, resulting in lower prices.
Defenders of brand names believe:
- Brand names provide information about quality to consumers.
- Companies with brand names have incentives to maintain quality to protect the reputation of their brand names.
