Perfect and Imperfect Markets Flashcards
Draw Graph, list characteristics (5)
Perfectly Competitive Market
- Correct Graph
- Perfect information
- No barriers to entry or exit
- homogenous product
- Normal profit in the long run
- All firms price takers
- Huge number of firms
Draw Graphs (2), list characteristics (5)
Monopolistically competitive market
- Correct Graph
- Some barriers to entry
- Some informational imperfections
- Some differentiation
- SNP in SR, NP in LR
- Not efficient
- Large numer of firms, slight price making power but mostly price takers
Draw Graph (2), list characteristics (5)
Oligopoly market
- Kinked demand graph or non-kinked
- Few large firms
- Imperfect information
- high levels of differentiation and non price competition
- Interdependent firms with some price making power
Draw Graph, list characteristics (5)
Monopoly market
- Corrct graph
- One large firm dominates market (over 25% share from CMA)
- Highly asymmetric information
- low choice, low competition, high profits
- Extremely high barriers
Draw Graph, list characteristics (5)
Collusive Oligopoly Graph, consequences
- Monopoly graph broken up into profit of individual firms
- Loss of welfare as not allocatively efficient
- Price gouging can occur to exploit consumers for profit
- Firms may become inefficient as they have no incentive to innovate on quality or production
Types of efficiency
Allocative: MC = P, welfare maximised as S = D
Dynamic: capacity to become more efficient in the future, SNP reinvested into FOP
Productive: ATC Minimised
What is a concentration ratio
The amoutn of market shar held by a number of firms, e.g. a 5 firm concentration ratio
Graph, Characteristics (4)
Draw and give characteristics for a natural monopoly.
Correct graph with LRATC, LRMC
Allocatively efficient
No productively efficient point as LRATC tends to zero
Typically larger scale, necessity such as water or electricity.
Cannot be ethically and effectively provided by free market, heavily government subsidised to absorb losses.
Explain hit and run competition
Firms undercut market prices to make quick profits before exiting the market. Incumbents cannot react quickly enough, and challengers don’t set up long term infrastructure, only staying in the market for a matter of weeks or months.
Explain contestability
Contestability is the ability of new firms to challenge incumbents and gain market share. This is largely affected by the concentration ratio in the market, as well as the barriers to entry.
Explain and graph the three degrees of price discrimination
1: Every consumer is charged the maximum they are willing to pay, no consumer surplus created.
Graph is demand curve with each consumer on x axis, price paid on y axis. Unlikely to exist in the real world
2: initially sold at high cost, surplus sold off cheaply beyond a certain point. This is to profit from consumers who only consume a small amoiunt e.g. telephone minutes
Explain the process of creative destruction
Innovation occurs within a market, making incumbent firms obsolete. this causes them to go out of business, and creative destruction has occurred to reform the market.
