Perfect competition and monopoly Flashcards
Define perfect competition.
Market structure with many firms, free entry, identical products, and price-taking behavior.
Define short run under perfect competition.
Insufficient time for new firms to enter the industry.
Define long run under perfect competition.
Enough time for new firms to enter the industry.
What is rate of profit in perfect competition?
Total profit as a proportion of the capital employed (TΠ/K).
Define increasing-cost industry.
Industry where average costs increase as the industry expands.
Define constant-cost industry.
Industry where average costs stay constant as the industry expands.
Assumptions under perfect competition.
Firms are price takers, complete freedom of entry, identical products, perfect knowledge.
Define monopolistic competition.
Many firms, freedom of entry, differentiated products, some price control.
Define oligopoly.
Few firms, potential barriers to entry, some degree of market power.
Define monopoly.
Single firm, significant barriers to entry, unique product, considerable price control.
Define barrier to entry.
Obstacles that prevent new competitors from easily entering an industry.
Define natural monopoly.
A single firm can supply the entire market at a lower cost than multiple firms.
Define switching costs.
Costs incurred by consumers to switch suppliers.
Define network externalities.
The value to a consumer increases as more consumers use the product.
Define limit pricing.
Setting prices low to deter new competition.
Characteristics of a monopoly.
Barriers to entry, unique product, control over price.
How do monopolists determine equilibrium price and output?
By setting outputs where marginal cost equals marginal revenue.
Profit possibilities for a monopolist.
Supernormal profit, normal profit, or loss.
Efficiency of monopolists.
They may not be productively or allocatively efficient due to lack of competition.
Define perfectly contestable market.
Free and costless entry and exit, the incumbent cannot respond immediately to entry.
Define hit and run.
Strategy to enter the market, make short-term profits, and exit before incumbents react.
Price and profit in contestable markets.
Competition can enter and make profits, keeping prices down, monopolies make normal profit.
Actual vs. potential competition.
Actual competition is present, potential competition is the threat of new entrants.
Importance of costless exit in contestable markets.
Encourages competitive pressure, allows for easy exit without significant losses.
Compare perfect competition and monopoly on price/output.
Perfect competition: P=MC, higher output. Monopoly: P>MC, lower output.
Advantages of monopoly for the public.
Potential for lower prices due to economies of scale, efficiency incentives, innovation.
Disadvantages of monopoly for the public.
Higher prices, lower output than perfect competition, less product variety.
Benefits of perfect competition for society.
Efficient pricing, firms respond quickly to consumer changes, productive efficiency.
Disadvantages of perfect competition for society.
Assumes no economies of scale, potential for transient inefficiencies.
Contestable markets and public interest.
Low costs and prices due to potential competition; in practice, may allow for supernormal profits.
Define imperfect competition.
Collective name for monopolistic competition and oligopoly.
Factors determining firm’s market power.
Number of firms, barriers to entry, product differentiation.
Strengths of the theory of contestable markets.
Provides a nuanced view by considering potential competition, not just existing firms.
