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Microeconomics introduction > perfect competition and monopoly > Flashcards

perfect competition and monopoly Flashcards

1
Q

Define consumer surplus

A

the difference between what consumers were willing to pay, and what they actually pay

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2
Q

Define producer surplus

A

the difference between what producers are willing and able to supply a good for and the price they actually receive

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3
Q

When does dynamic efficiency occur?

A

in the long-run

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4
Q

What is dynamic efficiency linked to?

A

the pace of innovation and investment, leads to the improvements in the performance and quality of the product

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5
Q

What is needed for dynamic efficiency to occur?

A

supernormal/abnormal profits

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6
Q

Give 4 characteristics of perfect competition

A

large number of small buyers and seller (theoretically infinite)

no barriers to entry or exit

perfect knowledge/information

goods are homogenous

price takers

no abnormal profits made in the long-run

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7
Q

why is the market price and marginal revenue flat in perfect competition?

A

as no matter how much is sold the firm can sell at the same market price

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8
Q

Explain why a firm in perfect competition cannot make abnormal profits in the long-run

A

due to no barriers to entry, any abnormal profits will attract new entrants into the industry

this increases the market’s supply, reducing the price until all abnormal have been competed away

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9
Q

Explain why a firm in perfect competition will not make a loss in the long-run

A

due to no barriers to entry, if firms are making a loss, some will choose to leave the market

this will decrease supply, pushing up price until no losses are being made

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10
Q

What profit is made in the long-run in perfect competition?

A

normal profit

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11
Q

What efficiencies does a perfect competition firm operate at in the long-run?

A

productively efficient

allocatively efficient

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12
Q

erfect competition will only result in allocative efficiency if…

A

… there are no externalities (positive or negative) in the market

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13
Q

short run equilibrium of firm in perfect competition

A

In a competitive market, the firm is a price taker and MR = P

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14
Q

why is the long run supply curve less steep than the short run?

A

Each firm can fully adjust all factors

The number of firms in the industry can vary

In the extreme case where all potential and existing firms have identical costs, the long-run industry supply curve is horizontal at the price corresponding to the lowest point on each firm’s LAC curve.

Profit is always zero.

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15
Q

In a perfectly competitive
market do Firms cover their cost of capital?

A

yes

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16
Q

Over the last 30 years UK
markets have become more
competitive yes or no?

A

no

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17
Q

which market structure has the lowest price?

A

perfect competition

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18
Q

give 3 conclusions that can be made about perfect competition

A

In a perfectly competitive market firms’ profits are always zero in the long run.

Competitive markets maximize surplus or welfare.

An important benchmark for other market structures.

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19
Q

what are 4 characteristics of monoploys

A

25%+ of market share

price makers

profit maximising

abnormal profits

high barriers to entry

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20
Q

At what point will a monopoly operate at?

A

at the point of profit maximisation, where MR = MC

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21
Q

How could a monopoly be deemed as disadvantageous to the consumer?

A

operating below the point of allocative efficiency

thus there is a deadweight loss to society

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22
Q

What is deadweight loss?

A

the reduction in economic surplus resulting from a market not being in competitive equilibrium

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23
Q

How could a monopoly be deemed as advantageous to the consumer?

A

make supernormal profit, so can be dynamically efficient

this could be used for investment, innovation, research and development, which could reduce costs in the long-run

this could then be passed onto the consumer in terms of lower prices

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24
Q

Give 3 determinants of monopoly power

A

high barriers to entry

low number of competitors

advertising and product differentiation

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25
Q

Give 2 types of legal barriers to entry

A

licences

patents

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26
Q

Explain what is meant by absolute cost barriers

A

the large amount of capital required to set up a firm in some markets

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27
Q

Explain what is meant by relative cost barriers

A

AC of new firms is higher than AC of incumbent firms

incumbent firms enjoy economies of scale and the benefits of R + D

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28
Q

Explain how high barriers to entry is a cause of monopoly power

A

decreases the number of potential competitors

means that one firm can dominate the market

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29
Q

When does a natural monopoly occur?

A

occurs when the benefits of economies of scale in an industry are so large that it is uneconomic for more than one firm to supply in that industry

An industry is a natural monopoly when a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms.

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30
Q

Explain how high relative cost barriers is a cause of monopoly power

A

AC of new firms would be higher than the incumbent monopoly

because the monopoly has dynamic efficiency, economies of scale, R + D, etc

discourages new firms from entering the monopoly, reducing competition, causing/increasing the monopoly power

31
Q

name 5 sources of monopolys

A

Superior product offer

Government license

Barriers to entry

Minimum efficient scale (natural monopoly)

Illegal practices (abuse of market power)

32
Q

what is the welfare cost of a monopoly?

A

due to operating above marginal costs there is less quantity sold and this in turn leads to them falling short of social optimum

The monopolist produces less than the socially efficient quantity of output.

33
Q

why would a government grant monoploy?

A

To facilitate innovation (e.g. patents)

To cover fixed costs (e.g. rail)

To generate revenue (license auctions)

34
Q

how do you minimise deadweight loss from a monoploy?

A

The monopolist can set different prices for different (groups of) customers

Differential pricing increases the monopolist’s profit and reduces the deadweight loss.

Discrimination is more likely to be successful for goods that cannot be easily re-sold.

I.e. personalised items; medical treatments

(discriminating monopoly)

35
Q

Give 5 characteristics of monopolistic competition

A

large number of small buyers and sellers

few and low barriers to entry

good knowledge/information

goods are non-homogenous / goods are slightly differentiated

has some market power

36
Q

Explain what happens if a firm is making abnormal profit in a monopolistic competition market

A

low barriers to entry allow new competitors to enter the market

this has the effect of reducing the % of overall market share each individual firm enjoys, and make the demand for each product more PED elastic (due to an increased number of substitutes)

this shifts the AR and MR curves downward, competing away abnormal profits away

37
Q

For a firm is monopolistic competition, when can abnormal profits be made?

A

in the short-run

38
Q

Explain what happens if a firm is making abnormal profit in a monopolistic competition market

A

Short-run economic losses encourage firms to exit the market.
Decreasing the number of products offered.
Increasing demand faced by incumbent firms.
Demand for the incumbent firms’ products increases, and their profits increase too.

39
Q

Give 2 reasons why firms in monopolistic competition are not forced to be productively or allocatively efficient

A

differentiated products

lack of rigorous competition

40
Q

Compare the PEDs for a monolpoly and a firm in monopolistic competition

A

PED is more elastic for the firm in monopolistic competition

41
Q

Compare the PEDs for a firm in perfect competition, and a firm in monopolistic competition

A

PED is more elastic for the firm in perfect competition

42
Q

Explain how monopolistic competition can improve consumer choice of products

A

low barriers to entry mean that there is intense competition between firms

provides an incentive to compete for market share and profit

leading to more choice of product for consumers

43
Q

Explain why the increased product choice for consumers, as a result of monopolistic competition may not always be beneficial

A

consumers have bounded rationality and may not make optimal decisions if there is a bewildering choice

44
Q

Referring to MC and price, give a potential benefit of monopolistic competition

A

in monopolistic competition, prices are kept closer to marginal cost, leading to improved allocative efficiency

45
Q

Explain why monopolistic competition may not be beneficial to the firms, in terms of productive efficiency

A

although competition keeps prices low, the saturation of products may lead to firms not exploiting economies of scale

this leads to a loss of productive efficiency

46
Q

explain welfare and monopolistic competition

A

There is the normal deadweight loss of monopoly pricing in monopolistic competition caused by the markup of price over marginal cost.

47
Q

summary of monopolistic competition

A

A monopolistically competitive market is characterised by three attributes: many firms, differentiated products, and free entry.

The equilibrium in a monopolistically competitive market differs from perfect competition in that each firm has excess capacity and each firm charges a price above marginal cost.

Monopolistic competition does not have all of the desirable properties of perfect competition.

There is a standard deadweight loss of monopoly caused by the markup of price over marginal cost.

48
Q

Give 4 characteristics of a oligopoly

A

few firms control majority of the market share

high barriers to entry and exit

sticky or rigid prices

firms are interdependent

non-price competition

some product differentiation

49
Q

Why are firms in an oligopoly able to make long-run abnormal profit?

A

due to high barriers to entry

50
Q

Why are firms in an oligopoly likely to be dynamically efficient?

A

as they face stiff competition so they are likely to use supernormal profits in order for future gain and to keep up with competition

51
Q

How do firms in an oligopoly prefer to compete?

A

using non-price competition

52
Q

Give 3 examples of non-price competition

A

advertising

marketing campaigns

loyalty programs

53
Q

As firms in an oligopoly choose not to compete on price, what does this result in?

A

sticky/rigid prices

54
Q

Why is there an incentive for firms in an oligopoly to collude and fix prices? (2 reasons)

A

it would maximise their joint profits

it would increase their producer surplus

55
Q

What law would it break if firms in an oligopoly decided to collude?

A

EU competition law

56
Q

If firms in an oligopoly do collude, what market structure would they effectively be operating as?

A

a monopoly

57
Q

What would the 2 main costs to consumers from firms in an oligopoly colluding?

A

higher prices

lost consumer surplus

58
Q

What is meant by a non-collusive oligopoly?

A

where firms in the market act independently when setting prices

59
Q

What is meant by a collusive oligopoly?

A

where firms collude to fix prices or overall market supply

60
Q

Why doesn’t it make sense for a firm in an oligopoly to raise its price?

A

if it raises its price, other firms will not follow, so you lose a lot of quantity demanded

61
Q

Why doesn’t it make sense for a firm in an oligopoly to lower its price?

A

if it lowers its price, other firms will follow, so the quantity demanded wouldn’t massively increase

62
Q

Is a competitive oligopoly good for consumers and/or firms?

A

good for consumers

bad for firms

63
Q

Is a collusive oligopoly good for consumers and/or firms?

A

good for firms

bad for consumers

64
Q

what is the key feature of an oligopoly?

A

Because of the few sellers, the key feature of oligopoly is strategic interaction.

65
Q

name the 2 forms of collusion

A

Implicit (tacit) agreement between existing firms to avoid or limit competition with one another.

Explicit formal agreements between firms (cartel). Mostly illegal

66
Q

what is game theory?

A

Game: A situation in which decisions are necessarily interdependent normal form or extensive form
cooperative or non-cooperative

Strategy: A game plan describing how the player will act or move in every conceivable situation

Dominant strategy: A player’s best strategy is independent of those chosen by others

Nash Equilibrium: mutual best-response strategies

67
Q

name an oligopoly

A

OPEC

68
Q

It is more difficult to collude if…

A

Market conditions are changing rapidly

There are no barriers to entry

The product is not standardised

There are too many firms in the industry to cooperate

Firms have surplus capacity

69
Q

name more olipoly models

A

Bertrand competition
Similar to Cournot except that firms focus on price rather than output

Stackelberg leadership
The leader firm (Market Leader) moves first and then the follower firms move sequentially

70
Q

what are characteristics of contestable markets

A

Characterised by
Free entry and free exit
No sunk costs
Allows hit-and-run entry

May constrain incumbent firms from exploiting their market power

71
Q

Why is the number of firms that exist in a contestable market irrelevant?

A

due to the constant threat of new competition

72
Q

What is the point of allocative efficiency?

A

MC = AR

73
Q

What is the point of productive efficiency?

A

MC = AC

74
Q

Explain why the point MC = AR is allocatively efficient

A

as the value that consumers place on a good or service (reflected in the price they are willing and able to pay) equals the marginal cost of the scarce factor resources used up in production

Microeconomics introduction (7 decks)

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