Perfect competition, imperfect competition, Monopoly Flashcards
Price taker
A firm which passively accepts the ruling market price set by market conditions outside their control
Price maker
A firm possessing the power to set the market price within the market
Market structure
The organisation of a market in terms of the number of firms in the market and the way in which they behave
Perfect competition
6 conditions
A market displaying 6 conditions
-Large number of buyers and sellers
-Perfect information
-Price takers
-Homogeneous product (identical in eyes of consumer)
-No barriers to entrance or exit in the long run
-Profit maximisers (MC=MR)
Imperfect competition
Any market structure lying between the extremes of perfect competition and pure monopoly
Profit maximisation
Occurs when a firms total sales revenue is furthest above total cost of production
Barries to market
Entry- makes it difficult or impossible to enter market
Exit- makes it difficult or impossible to leave a market
Exit barriers examples
High exit costs
Opportunity cost
Specialized assets
Entry barrier examples
Patent protection
Consumer loyalty
Subsidies to existing firms
High start up costs
Persuasive + saturation advertising
Consumer sovereignty
Through excersising spending power consumers collectively determine what is produced in the market
Strongest in a paerfectly competitive market
Producer sovereignty
Producers or firms in the market dtermine what is produced and what prices are charged
Quantity setter
Firm dicates volumer produced rather than price, market demand curve then shifts to dictate the maximum price where the firm is successful selling its chosen quantity
Concentration ratio
Ratio indicating the total market share of a number of leading firms in a market or the output of these firms as a percentage of total market output
Resource misallocation
When resources are allocated in a way that does not maximise economic welfare
Limit pricing
Reducing the price of a good to just above the average cost to deter the entry of new firms to the market, this is because it would be unprofitable to do so
Predatory pricing
Temporarily reducing the price of a good to below average cost to drive smaller firms or new entrants out of the market
Perfect competition pros
-Allocative efficiency as P=MC
-Productive efficiency achieved (MC=AC), costs minimised
Productive Efficiency
Occurs where production of goods is at lowest point on AC curve (MC=AC)
Allocative efficiency
Where market demand = market supply
Resources allocated in line with consumer desire
Perfect competition cons
Dynamic inefficiency- no supernormal profit to be reinvested, no technology advancement or innovation (exaccerbated by absence of patents)
Lack of EoS
Cost cutting to compete sacrifices quality (customer service)
Shutdown condition
Occurs where AR<AVC
Insufficient revenue made to cover variable costs
Shutdown optimal to minimise losses as only fixed costs need to be paid
Monopoly
