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Pefect Competition,imperfectly competitive markets and monopoly Flashcards

1
Q

What are the perfect competition characteristics

A

-free entry and exit

-perfect knowledge

-Firms are price takers (prices are the same throughout the market )

-Perfectly elastic

-firms can make supernormal profit in the short run

-firms can make normal profit in the long run

-products in the markets are homogenous

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2
Q

When are avergae profits occur

A

Average Revenue-Average Costs

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3
Q

When does profit maximise?

A

MC=MR

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4
Q

What do you do to find the total profit

A

You have to find the area of the rectangle.

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5
Q

List the most copetitive to the least competitive markets in order?

A

-Perfect competition
-Monoploistic Competition
-Oligopoly
-Monopoly

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6
Q

What are the characteristics of a monopolistic market

A

-Many buyers and many sellers

-Different but similar products

-Thye are price makers to certain degree

-low barriers to entry

-imperfect knowledge(high knowledge)

-In the short-run firms make supernormal profit

-In the long-run firms make normal profit

-Demand curve is elastic (demand curve is slightly downward sloping )

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7
Q

How do you work out the profit/Average profit for per unit

A

total profit/Qunatity

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8
Q

How do you know there is profit?

A

When Average Revenue > Average Costs

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9
Q

What is a collusive oligopoly

A

Non-competing

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10
Q

What is a non-collusive oligopoly

A

-Competing

-Engages in price war

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11
Q

Define price discrimination

A

Involves a firms charging different prices to different consumers for the same product.

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12
Q

What may price determination depend on

A

Prices charged will depend on the consumer’s:
-Ability to pay
-Willingness to pay

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13
Q

How many levels of price discrimination are there?

A

-1st Degree/Perfect Price Discrimination
-2nd Degree Price Discrimination
-3rd Degree Price Discrimination

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14
Q

What is 1st degree/perfect price discrimination

A

when the firms is able to charge the maximum possible price to individual consumers

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15
Q

What is 2nd degree price discrimination

A

When the firm is able to charge the maximum possible price to different groups of consumers based on the quantity bought.Typical examples are with bulk buying
(the more tha tis broght the less is paid for per unit)

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16
Q

What is 3rd degree price discrimination

A

When the firm identitfies groups of consumers with similar characteristics

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17
Q

What is consumer surplus

A

The difference between the maximum amount the consumer is willing and able to pay and what they actually pay

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18
Q

What is producer surplus

A

The extra benefit a producer recieves when they sell a product for more than the minimum price they were willing to accept.

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19
Q

What is bloc pricing

A

There are more than one group of consumers in the market and the firm is able to price discriminate by charging lower prices to those groups that are willing to buy more

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20
Q

How may firms identify different groups of consumers to give discounts

A

Depending on the size of the order.The greater the bulk buying the higher the discount.

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21
Q

What type of market structure usually price discriminate

A

Monopolies

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22
Q

Why might a firm price disciminate

A

So they can maximise their profits

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23
Q

What may be the disadvantages to consumers of price discrimination

A

-Price discimination usually results in a loss of consumer surplus.Since P>MC there is a loss of allocative efficiency

-It strengthens the monoploy power of firms,which could result in higher prices in the long-run for consumers

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24
Q

What may be the advantages to consumers of price discrimination

A

-Consumers could benefit from a net welfare gains as a result of cross subsidisation,if they recieve a lower price.This is because some customers who were previously excluded by high prices might now be able to benefit from the goods and services,as people with higher income are charges more it allows less well-off people to also have access to goods at a lower price.

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25
What are the advantages to producers when price disciminating
-Producers make better use of spare capacity -Higher supernormal profits,which results from price discrimination,could lead to stimulate investment
26
What is the order of the market structures spectrum from left to right
-Perfect Competition -Monopolistic Competition -Oligopoly -Monopoly
27
On the market structure spectrum going from right to left can have two effects which are..
-Lower barriers to entry -More contestable
28
On the market structure spectrum going from left to right can have two effects which are...
-More maret power -Less efficiency
29
What is each market charaacterised by (3 things)
-The number of firms in the market -The degree of rpoduct differentiation -Ease of entry into the market
30
Why may the degree of product differentiation matter
-The more differentiated the products,the less competitive the market -The products can be differentiated using price,branding and quality.This affects cross price elasticity of demand.
31
In what market structure would there be homogenous products
In a perfectly competitive market.
32
Why may barriers to entry be designed to prevent new firms from entering the market profitably
As it the prevention can lead to increase in producer surplus.
33
Examples of high barriers:
-Economics of scale -Brand loyalty -Having strong reputation -Controlling the important technologies in the market
34
When do firms break even
TR=TC
35
What is the tradiditional theory of the firms based on
It is based upon the assumption that firms aim to maximise profits.
36
Where is profit maximised
MC=MR (extra unit produced gives no extra loss or no extra revenue)
37
when do profits increase
MR>MC
38
When do profits decrease
MC
39
why may firms maximise profits:
-greater wages and dividends ofr entrpreneurs -retained profits are cheqap source of finance -interests of owners and shareholder may be to maximise profits
40
What type of business are keen to have short run profit maximisaation
PLC
41
What may be the conflict between shareholders adn managers
Mangers want personal gain,such as bonus,rather than to maximise the dividends of the shareholders.
42
Why might a firm have survival as its objective
Some firms may be new entering competitive markets.During recssions or negative output gap the firms might have survival as the objective.
43
Why might growth be an objective
They could take advantage of economies of scale.So in the long run their average cost would be lower making them more profitable. They can grow by merger and taking over.Large firms can be more competitve and efficient in the long run when they research and develop
44
Why may increasing market share be an objective
Increases the chance of surviving in the market whihc can be maximised byt maximising sales.
45
Why might quality be the objective
Firms might increase their competitiveness by improving their quality.This can improve customer service or the qauilty of the good.can be achieived by innovation
46
at what point does firms maximise sales revenue
MR=0 meaning extra unit sold generates no extra revenue
47
At what point does sales maximisation happen
Average costs=Average Revenue AC=AR
48
what could be other objectives a firm may have
-society -environmental -ethical where there are philanthropic owners -managerial for personal gains -worker welfare
49
The satisficing principle
A firm is profit satisficing when it is earning just enough profits to keep its shareholders happy.
50
What is divorce of ownership and control
The process in which owners become increasingly separated from those managing the buiness.
51
Characteristics of perfect competitive market (7)
-Many buyers and sellers -Sellers are price takers -Free entry to and exit from the market -perfect knowledge -homogenous goods -firms are short run profit maximisers -factors of production are perfectly mobile
52
Characteristics of monpolistically competitive market?(7)
-imperfect competition firms are short-run profit maximisers -sell non-homogenous products but there is product differrentiation (there is close substitiutes hence elasticity of demand is sold high) -large number of buyers and sellers -firms in this market compete using non-price competition -no barriers to entry or exit from the market -Some firms have some degree of price setting power -Imperfect information -(example include hairdressers adn regional plumbers)
53
In the short run where do monopolistic competition maximise profits
MC=MR
54
What type of profit does a monopolistic market earn in the short run and how is it represented
It is represented by the area and earn supernormal profits
55
What type of profit does a monopolistic market earn in the long run
Normal profit
56
In the long run why might firms in a monopolistic market earn normal profit
-Due to low barriers of entry new firms enter the market as they are attracted by the profits that exisiting firms are making. -Which makes dmeand more elastic for existing firms -then only normal profits can be made in the long run
57
What may firms in a monopolistic market do to try stay in the short run
Differentiating the products and innvoate.
58
ADV of monopolistic competition
-firms are allocatively inefficent in the short and long run(p>MC) -Variety of choice -low barriers to entry -The supernormal profit in the short-run might increase dynamic efficiency through investment
59
When does allocative efficency occur
MC=AR or P=MC
60
Disadvantages of monopolistic competition
-In the lognrun,dyanmic efficency might be limited due to the lack of supernormal profits -Monopolistic comeptitive firms are not allocatively or productively efficient. - X inefficient ,firms have little incentive to minimise their costs
61
Characteristics of an oligopoly
-High barriers to entry and exit -There are high barriers to entry and exit from an oligopoly.High barriers to entry make the makret less competitive -High concentration ratio -In an oligopoly,only few firms supply the majority of the market.For example,in the UK supermarket industry is an oligopoly.The high concentration ratio makes the marekt less competitive. -Interdependence of firms -Firms are interdependent in an oligopoly.This means that the actions of one firm affect firm's behaviour. -Product differentiation -Firms differentiate their products from other firms using branding.The degree of product differentiation can change how far the market is an oligopoly
62
What is collusive oligopoly
When a firm agree to work together on something (for example they might choose to set a price or fix the quantity of the output they produce,which minimises the competitive pressure they face)
63
how does collusion maximise profits for the firms colluding
Collusion leads to a lower consumer surplus,higher prices and greater profits for the firms colluding.It can allow oligopolists to act as a monopolist and maximise their joint profits
64
Why may oligopoly market may deter new entrants and anti-competitive
Firms in a oligopoly have a strong incentive to collude.By making agreements,they can maximise their own benefits and restrict their output,to cause the market price to increase.
65
when does non-collusive behaviour occur
When firms are competing
66
What are the two types of collusion
-Overt (formal agreement) or tacit (no formal agreement)
67
Difference between cooperation adn collusion
Collusion occurs with poor intentions but cooperation will be beneficial
68
What is the cartel
Cartel is a group of two or more firms which have agreed to control prices ,limit output,or prevent the entrance of new firms into the market
69
how may cartels not imrpove consumer welfare
-higher prices -restricted outputs
70
explain price wars
Is a type of price competition whcih involves firms constantly cutting their prices lower than its conpetitors
71
What does Non price competition aim to do
Aims to increase the loyalty to a brand which makes demand for a good more price inelastic
72
Adavantages of oligopoly
-Higher profits whcih could be a source of goivernment revenue -industry standards could improve this is beacuse firms can collaborate on technology and imrpove it.It saves on duplicate research and development -oligopolies can earn significant supernormal profits(due to economies of scale),which can be used in research and evelopment -high degree of competition gives firms an incenive to strive to improve the quality of goods and services -Consumers may benefit from lower prices because of economies of scale
73
Disadvantages of oligopolies
-If firms colude,there is a loss of consumer welfare,since prices are raised and output is reduced -Basic model of oligopoly suggests that higher prices and profits and ineffiency may result in a misallocation of resources compared to the outcome in a competitive market. -collusion could reinforce the monopoly power of existing firms and makes it hard for new firms to enter.The absence of competition means effiency falls.this increases the average cost of production -limited competition means fewer choices -There is potential for firms to engage in illegal collusion or operate as cartels by fixing price or output
74
Characteristics of monopoly
-profit maximisation (A monopolist earns supernormal profits in the both the short-run and the long-run) -sole seller in a market(a pure monopoly) -high barriers to entry -price maker -price discrimination
75
when does a firm have monopoly power
When on firm dominates the amrket with more than 25% market share
76
Can there be more than one firm in the market who has monopoly power
monopoly power can be gained when there are multiple suppliers.If two large firms in an oligopoly(several large sellers) have greater than 25% market share
77
Firms operating in which markets does have price makers and they have varying degrees of monopoly power.
Oligopolistic and monopolistic
78
What factors can influence monopoly
-barriers to entry -Economies of Scale -Limit pricing -Owning a resource -Sunk Costs -Brand loyalty -Set-up costs -The number of competitors -Advertising -The degree of product differentiation
79
How may economies of scale deter new firms from entering the market
-as firms grow larger average costs of production falls - this means exisiting firms have a cost advantage over new entrants to the market,which maintains their monopoly power
80
Explain the limit pricing
This involves the existing firm setting the price of their good below the production costs of the new entrants,to make sure new firms cannot enter profitability.
81
Advantages to monopoly
-Monopolies can earn significant supernormal profits which can be invested into research and development -since monopolies are large,they can exploit economies of scale - lower average costs of production(lower prices)- can improve efficiency
82
Disadvantages of monopoly
-higher prices -reduced consuerm choice -reduced innovation(firms could have less incentive to innovate because they dont face competition) -inefficiency-less compeittion-highe costs-lower quality products -Market power abuse(firms may enage in predatory pricing) -Reduced Economic growth
83
How may the government intervene in a high monopoly power market
-Price cap regulation -Splitting/breaking-up firms with large monopoly power -Qulaity standards on firms with large monopoly power -Windfall tax on firms that have made exorbitant profits to the unsual disadvantage of the public
84
How could price cap regualtion make
Forces monopolies to price their goods and services below the profit maximising price.This would steer the market away from the market failure and towards efficient allocation of resources (P=MC)
85
Why may the governemnt break up firms with large monopoly power
To make the market more competitive
86
Why might the governemnt focus on the quality standard on firms with large monopoly power
To ensure good qaulity products for consumers
87
Disadvantages of high monopoly power
-high prices -Limited choices poor services -information failure in the market -firms are not productively efficient -Firms are likely to be X-efficient -The more the government steers/intervenes in the market towards competition the lesser the inefficiencies
88
How may high monopoly power be benificial for consumer
-Large economies of scale -Dynamic efficiency (invention and innovation and technical efficiency -Some oligopolistic markets/firms with high monopoly power are competitve and therefore the market could act in the interest of the consumer some oligopolistic markets/firms with a high monopoly power are contestable (A contestable market is a market with low barriers to entry regardless of the type of market it is)

micro (5 decks)

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