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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
Give 2 types of legal barriers to entry
licences patents
26
Explain what is meant by absolute cost barriers
the large amount of capital required to set up a firm in some markets
27
Explain what is meant by relative cost barriers
AC of new firms is higher than AC of incumbent firms incumbent firms enjoy economies of scale and the benefits of R + D
28
Explain how high barriers to entry is a cause of monopoly power
decreases the number of potential competitors means that one firm can dominate the market
29
When does a natural monopoly occur?
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.
30
Explain how high relative cost barriers is a cause of monopoly power
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
name 5 sources of monopolys
Superior product offer Government license Barriers to entry Minimum efficient scale (natural monopoly) Illegal practices (abuse of market power)
32
what is the welfare cost of a monopoly?
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
why would a government grant monoploy?
To facilitate innovation (e.g. patents) To cover fixed costs (e.g. rail) To generate revenue (license auctions)
34
how do you minimise deadweight loss from a monoploy?
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
Give 5 characteristics of monopolistic competition
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
Explain what happens if a firm is making abnormal profit in a monopolistic competition market
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
For a firm is monopolistic competition, when can abnormal profits be made?
in the short-run
38
Explain what happens if a firm is making abnormal profit in a monopolistic competition market
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
Give 2 reasons why firms in monopolistic competition are not forced to be productively or allocatively efficient
differentiated products lack of rigorous competition
40
Compare the PEDs for a monolpoly and a firm in monopolistic competition
PED is more elastic for the firm in monopolistic competition
41
Compare the PEDs for a firm in perfect competition, and a firm in monopolistic competition
PED is more elastic for the firm in perfect competition
42
Explain how monopolistic competition can improve consumer choice of products
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
Explain why the increased product choice for consumers, as a result of monopolistic competition may not always be beneficial
consumers have bounded rationality and may not make optimal decisions if there is a bewildering choice
44
Referring to MC and price, give a potential benefit of monopolistic competition
in monopolistic competition, prices are kept closer to marginal cost, leading to improved allocative efficiency
45
Explain why monopolistic competition may not be beneficial to the firms, in terms of productive efficiency
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
explain welfare and monopolistic competition
There is the normal deadweight loss of monopoly pricing in monopolistic competition caused by the markup of price over marginal cost.
47
summary of monopolistic competition
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
Give 4 characteristics of a oligopoly
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
Why are firms in an oligopoly able to make long-run abnormal profit?
due to high barriers to entry
50
Why are firms in an oligopoly likely to be dynamically efficient?
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
How do firms in an oligopoly prefer to compete?
using non-price competition
52
Give 3 examples of non-price competition
advertising marketing campaigns loyalty programs
53
As firms in an oligopoly choose not to compete on price, what does this result in?
sticky/rigid prices
54
Why is there an incentive for firms in an oligopoly to collude and fix prices? (2 reasons)
it would maximise their joint profits it would increase their producer surplus
55
What law would it break if firms in an oligopoly decided to collude?
EU competition law
56
If firms in an oligopoly do collude, what market structure would they effectively be operating as?
a monopoly
57
What would the 2 main costs to consumers from firms in an oligopoly colluding?
higher prices lost consumer surplus
58
What is meant by a non-collusive oligopoly?
where firms in the market act independently when setting prices
59
What is meant by a collusive oligopoly?
where firms collude to fix prices or overall market supply
60
Why doesn’t it make sense for a firm in an oligopoly to raise its price?
if it raises its price, other firms will not follow, so you lose a lot of quantity demanded
61
Why doesn’t it make sense for a firm in an oligopoly to lower its price?
if it lowers its price, other firms will follow, so the quantity demanded wouldn’t massively increase
62
Is a competitive oligopoly good for consumers and/or firms?
good for consumers bad for firms
63
Is a collusive oligopoly good for consumers and/or firms?
good for firms bad for consumers
64
what is the key feature of an oligopoly?
Because of the few sellers, the key feature of oligopoly is strategic interaction.
65
name the 2 forms of collusion
Implicit (tacit) agreement between existing firms to avoid or limit competition with one another. Explicit formal agreements between firms (cartel). Mostly illegal
66
what is game theory?
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
name an oligopoly
OPEC
68
It is more difficult to collude if…
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
name more olipoly models
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
what are characteristics of contestable markets
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
Why is the number of firms that exist in a contestable market irrelevant?
due to the constant threat of new competition
72
What is the point of allocative efficiency?
MC = AR
73
What is the point of productive efficiency?
MC = AC
74
Explain why the point MC = AR is allocatively efficient
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 (8 decks)

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