Competition Flashcards
1
Q
define PC
A
refers to a theoretical market structure where numerous sellers offer identical products, with no barriers to entry or exit, and where no single firm can influence the market price, meaning all firms are considered “price-takers”
2
Q
characteristics of PC
A
- infinite buyers and sellers
- homogenous goods= firms are price takers
- no barriers to entry or exit
- perf info of market conditions
- firms are profit maximisers
3
Q
describe PC diagram
A
- market sets the price depending on demand and supply
= creates supernormal profits for firms @MR=MC
= incentivise new firms to join market= outwards shift in supply
= decrease prices of goods= decrease profit till only normal profit reached in LR - AR is flat as firms are price takers= makes demand perfectly elastic= infinite substitutes= change in price would lead to loss
4
Q
profit max
A
MR=MC
5
Q
allocative efficiency
A
D=MC or where P=MC
6
Q
productive efficiency
A
lowest point of AC curve
7
Q
dynamic efficiency
A
supernormal profit re-invested into firm
8
Q
evaluation of PC
A
- achieves allocative efficiency @D=MC
= meets consumer demand and increases choice - productively efficient= produce @ lowest AC
- minimise waste
9
Q
describe dynamics of competitive market
A
- in LR, firms productively and allocatively efficient
= provide consumers demands and low COP due to comp pressures - in SR, firms make supernormal profits= re-invest back into firm
= dynamic efficiency= decrease LRAC - consumers get wide variety of choice due to high number of firms in market
= goods likely to be high qual in order to gain consumer loyalty - innovation and improve qual= attract new customers and stay comp
- low costs means new firms aren’t able to comp on price terms of existing firms
10
Q
adv comp markets
A
- allocative efficiency= firms charge P=MC= consumers pay what it costs to produce= lower prices for consumers and resources follow demand
= high Q and qual= increase jobs - minimise AC and exploit all EoS= pass prices onto consumers= productively efficient
- minimise waste and produce on AC curve= x-ineffiency
- high Q produced= high job creation= labour is derived demand= increase employment and SOL
11
Q
disadv comp markets
A
- lack of dynamic efficiency in LR, only normal profit left= decrease progress over time
- leads to cost cutting in dangerous areas like healthcare and education= anti-social desires in order to remain comp
- high entry and exit nature of comp= new firms enter creatively by making new products etc= can destroy pre-existing firms
= increase unemployment and decrease SOL= creative destruction
12
Q
evalution of comp markets
A
- still dynamic efficiency in comp markets?
= may not have enough profit to re-invest if small scale firm - depends on levels of EoS
- natural monopolies don’t want comp
- depends on role of regulation in production
- weigh up static vs dynamic efficiency
= depends on market of good, if its a necessity like food don’t want monopoly, want adv of static efficiency like low prices - in some markets consumers willing to pay high price for variation and differentiated goods like new tech
13
Q
features of monopolistic competition
A
Many firms.
= concentration ratio is low= low market share of leading firms
Freedom of entry and exit.
Firms produce differentiated products.
= more realistic
Firms have price elastic demand
= they are price makers because the good is highly differentiated
Firms make normal profits in the long run but could make supernormal profits in the short term
Firms are allocatively and productively inefficient.
14
Q
describe diagram of of monopolistic competition
A
- firms make supernormal profits @ MC=MR in SR
= attract new firms with slightly differentiated goods= dilutes market share of existing products= cause inward shift of AR and MR
= demand moves to left until its tangential to AC
= @ LR equilibrium, firm is @ it’s profit maximising level of output
= making only normal profit (AR-AC) - principle of minimum differentiation= entering market with similar and barely differentiated goods makes it easier for firms to switch as there are close substitutes available
- demand is quite elastic due to substitutes
- highly competitive nature of market makes demand curve fairly elastic
= reduce pricing power of competing firms as higher price would just decrease demand to use alternative
= not particularly strong allocative efficiency - saturation of market might have a cost as many firms struggle for market share
= no firms or clusters of firms can achieve high level EoS
= means unit costs are higher than in a high concentration ratio market - strong non-price comp= leads to high quality product innovation but limited profits decrease this
- heavy spending on packaging, waste sent to landfill as firms compete on diff packaging methods etc= cause negative externality of production
15
Q
EVAL on monopolistic competition
A
- depends on motive of firm= not always profit maximising
- depends on brand loyalty and non price factors of demand
= may still choose good no matter how cheap substitutes are - consumers tend to benefit from more choice and lower prices
BUT firms can achieve EoS
= can be trade-offs between diff types of efficiency= like low prices but consumers get could prices even lower in less comp market due to EoS - increase in consumer choice doesn’t necessarily increase welfare
= behavioural economics studies suggest there’s too much choice= fall back on heuristic thinking like rules of thumb, default etc
= more choice on its own doesn’t improve welfare
16
Q
describe contestable market
A
- one that is open to actual & potential competition. A market is contestable where an entrant has access to all production techniques available to existing businesses and when entry decisions can be reversed without cost i.e. there are no sunk cost
- has hit and run comp= every time there’s profit, new firms join= more price comp= constantly reduced prices in LR= max allocative efficacy BUT reduces profit
- no costs to entry or exit of market, pool of new entrants willing and able to join market and high access to tech production methods etc
- the more contestable a market is, the more allocative efficiency
17
Q
barriers to contestability
A
- EoS
- expertise and reputation
- brandy loyalty
- legal barriers like market licenses and import controls
18
Q
how to improve contestability
A
- tough rules of predatory pricing
- deregulation of industry
- policies on international trade
