Perfect Competition, Imperfeclty Competitive Markets And Monopoly Flashcards
Where is profit maximisation on a diagram?
The level of output where marginal revenue and marginal costs are equal
What is the divorce of ownership and control (principle agent theory)? And why is it bad for a firm?
When there is a separation between the owners of a firm and the directors of the firm. This makes it difficult for the owners to control the conduct of the firm.
This can cause conflict of interest and objectives. Managers are incentivesed to take risks as they are not liable for failures. Owners also have asymmetric information.
This could mean that profits aren’t maximised.
What are the six characteristics of perfect competition?
No entry or exit barriers
Perfect information
Large number of buyers and sellers
Homogeneous products
Can buy and sell as much as you want
Firms are price takers
Why do firms in perfect and monopolistic competition make supernormal profit in the short run and normal profit in the long run?
When firms make supernormal profit, other firms who have perfect information join the market to also make supernormal profit.
And increase in supply lowers the price, total revenue and profit decreases until firms are only making normal profit.
What are the six characteristics of monopolistic competition?
Firms are price takers
Good information
Products are similar
Large number of buyers and sellers
You can buy and sell large quantities
Low entry and exit barriers
What are the characteristics of an oligopoly?
Concentrated market
High barriers to entry and exit
Firms are price makers
Differentiated product
Typically asymmetrical information
What are the types of collusion?
Overt collusion: when firms formally work together to raise prices (this is a cartel and is typically illegal with the exception of OPEC+)
Tacit collusion: When firms know it’s not in their best interests to compete so they informally work together
What are the positives and negatives of collusion?
For consumers: collusion can act as a monopoly, allocatively inefficient reducing supply to increase price
For firms: generally good as it raises profits, but one firm may cheat which hurts the other firms
What is a price war?
When firms reduce prices bellow the prices of a rival firm to attract customers from them.
Will only happen in the short run
What is a price agreement?
When a firm agrees to keep it’s prices constant, whether that’s with consumers, suppliers, the government or other firms
What is price leadership?
When there is one large firm that leads trends in price in the market. And when they raise prices other firms will also raise prices.
What is the significance of interdependence and uncertainty in a monopoly?
Interdependence increases the chance of collusion as firms rely on each other to keep profits high
Uncertainty decreases the chance of collusion as there is always a chance that one firm will choose not to collude and undercut other firms prices to increase their own market share.
