Monopolies and competitive markets Flashcards
What is meant by the term “market structure”
The number and size of firms within a market for a particular good or service
What are the properties of a market with perfect competition
- Large numbers of buyers and sellers
- Perfect information
- Homogeneous products
- Low barriers to entry
What is imperfect competition
A market structure that is not perfect competition
What are the features of a “pure monopoly”
- Single firm is the only producer
- No close substitutes available
- Price setting ability
- Significant market power
What are the main 6 objectives of firms
- Profit maximisation
- Sales maximisation
- Survival
- Growth
- Increasing market share
- Stakeholder objectives
What is meant by profit maximisation
When firms seek to make the largest possible positive difference between total revenue and total costs
What is the advantage of making a large profit?
- You can reinvest funds into innovation
- You can pay out higher returns to shareholders boosting share of sales
How does a firm become become “sales maximising”
Where the sales revenue is at a maximum
When is the sales value at a maximum
This occurs at the level of output where the sale of one additional unit of output will not add to overall revenue
Why might a firm prioritise survival
A large proportion of businesses fail within their first few years of operation
How does a firm prioritise growth
By increasing output and scale of operations
What is an advantage of prioritising growth?
Can benefit from from EOS
How does a firm prioritise market share?
When a firm attempts to maximise its market share % in terms of sales value and number of units sold
Advantages of increasing market share
Firms can benefit from monopoly power
Why might a firm want to prioritise stakeholder objectives?
To improve reputation
What are the advantages of perfect competition?
- Firms can achieve productive efficiency
- Firms can achieve alloctive efficiency
What is meant by Static efficiency
Static efficiency is about using resources efficiently now, using current resources to acheive productive and alloctive efficiency
What is meant bu the term barrier to entry
A barrier to entry is any feature of a market that makes it difficult to enter the market
What are the 5 barriers to entry
- Natural barriers
- EOS
- Legal barriers
- Product differentiation
- Sunk costs
Give two examples of natural barriers to entry
Climate
Location
How are EOS a barrier to entry
When a firm has an EOS they can set prices below entrant firms and make supernormal profits
What is a legal barrier to entry?
Copyrights, trademarks, patents
What advantages do trademarks provide firms
Legal rights to become a monopoly
How is product differentiation a barrier to entry?
Existing firms may have an advantage as they have spent lots of money on advertising to build customer profile
