monopolies and perfect competition Flashcards
what is a monopoly
one seller dominating the market
what is the difference between a monopoly and monopoly power
monopoly has 100% of market share
monopoly power have 25% of market share
what are the characteristics of monopolies
price makers
high barriers to entry/ exit
imperfect information
profit maximisers(MR = MC)
products are differentiated
why do monopolies not achieve allocative efficiency
they charge higher prices so less consumer surplus
why do monopolies not achieve productive efficiency
they do not produce at the minimum point of AC. So AC is higher as the firm is not exploiting full Economies of Scale
why do monopolies not achieve X- efficiency
monopolies become complacent with costs as they outcompete everyone in the market
how do monopolies achieve Dynamic efficiency
the monopoly makes LR supernormal profits
profits are reinvested into capital and R and D
why do monopolies tend to be successful
high barriers to entry keeps other firms out of the market
how do monopolies cause market failure
- they reduce the total level of society surplus
- by causing a DWL for them and consumers compared to the competitive price
what is the point where competitive firms produce
AR = MC
what is the shutdown condition
AR = AVC
what is the breakevencondition
AR = AC
what is the difference between loss shutdown and loss NO SHUTDOWN
in loss no shutdown the AVC is less than the AR
in loss shutdown the AVC is greater than the AR
why are the costs in the short run in perfect competition higher than the total revenue
in the short run, firms face fixed costs that cannot be adjusted, and they experience diminishing returns as they try to increase production without expanding FOP.
in the long run, firms have the chance to adjust FOP and optimize their costs
why is it only possible to make normal profits in the long run, in a perfectly competitive market structure
the market is contestable in the long run, due to low barriers to entry and exit
