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economics > perfect competition, imperfectly competitive markets and monopoly > Flashcards

perfect competition, imperfectly competitive markets and monopoly Flashcards

1
Q

profit maximisation

A

MC=MR

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2
Q

why do firms aim to profit maximise

A

greater dividends for shareholders
allows for lower costs
reward entrepreneurship

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3
Q

why might firms not want to aim for maximising profit

A

principle-agent problem link to asymmetric info
conflicting objectives between shareholders
shareholder activism
competitor suspicion

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4
Q

profit satisficing

A

sacrificing profits to satisfy as many stakeholders as possible

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5
Q

stakeholder

A

anybody interested or involved with how well a firm is performing

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6
Q

survival

A

short term objective for a hypercompetitive market

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7
Q

revenue maximisation on the graph

A

MR=0

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8
Q

revenue maximisation

A

each extra unit sold generates no extra revenue

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9
Q

why might a firm maximise revenue

A

economies of scale
predatory price - drives out new firms entering the market and drive out competition through low pricing
principle-agent problem - divorce between ownership and control

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10
Q

sales maximisation

A

AC=AR

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11
Q

why might a firm maximise sales

A

economies of scale
-limit pricing- takes away incentive of new firms enetering the market, limiting competition
-flood the market- enticing customers, gain loyalty then later change objective
greater market share

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12
Q

other objectives/responsibilities

A

-environmental
-social (corporate social responsibility)
-ethical and sustainable e.g Body shop

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13
Q

What are market structures characterised by

A

Number of firms in their market
The degree of product differentiation (homogenous)
Barriers to entry/exit

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14
Q

Examples of barriers to entry

A

Economies of scale
Control of technology
Brand loyalty (in elastic demand)
Reputation

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15
Q

Characteristics of perfect competition

A

Many buyers and sellers
Perfect knowledge
Free entry and exit
Short run profit max
Perfectly mobile factors of production

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16
Q

How is the price determined in perfect competitive markets

A

The interaction of demand and supply

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17
Q

Why are profits lower in perfectly competitive markets than oligopoly/ monopoly markets

A

Very small market shares
Market power is small
Making profit attracts new firms
Drives down average e costs from increased supply
Existing firms profit competed away

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18
Q

What profits can be made in short run (perfectly competitive markets)

A

Supernormal profits

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19
Q

What profits are made in the long run (perfectly competitive markets)

A

Normal profits (as they are competed away)

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20
Q

Advantages of perfect competition

A

In the long run their is lower price
P=MC allocative efficiency
Produce at bottom of ac curve
Productive efficiency
Supernormal profits
Invest for dynamic efficiency

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21
Q

Disadvantages of perfect competition

A

Long run dynamic effiency limited through loss of supernormal profits
Few/no economies of scale

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22
Q

Advantages of monopolistic markets

A

Allocatovely efficient short run
Variety of choice
More realistic theory

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23
Q

define market structure

A

The organisational and other characteristics of a market

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24
Q

Important features of a market structure

A

Number of firms in market
Market share
Costs incurred by firms
Nature of sales revenue
Barriers to entry and exit
Product differentiation
Price setting procedures

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25
Q

Characteristics of perfectly competitive markets

A

Lots of buyers and sellers
Perfect market information
Price takers
No barriers in the long run

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26
Q

Example of imperfect competitive market

A

Oligopoly

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27
Q

Define oligopoly

A

A market containing a few firms with high market shares

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28
Q

Why is their entry barriers in monopoly’s

A

To stop new firms entering the market and taking away profits

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29
Q

What is a natural barrier

A

Barriers that result from inhertent features of the industry
E.g. economies of scale or high r&d costs

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30
Q

What are artificial barriers to entry

A

Erected by the firms themselves
E.g. product differentiation and expenditure on advertising/marketing

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31
Q

Why might incumbent firms in a market set low prices

A

To deter new firms entering the market by making it unprofitable

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32
Q

What are predatory prices and what do they do

A

Prices set below AC, which remove recent entrants to the market

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33
Q

Define product differentiation and example

A

Marketing of generally similar products with minor variations
E.g. Apple and Samsung are rivals. Samsung differentiates but launches new phones more frequently and with wider options

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34
Q

Equation for total profit

A

Total revenue - total costs

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35
Q

Explain what MR = MC means

A

Firms profits are greatest when
Addition to sales from the last unit sold (MR)
Is equal to
Addition to total cost incurred from the production of last unit of output (MC)

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36
Q

What does the divorce of ownership from control mean

A

Owners of firms and those who manage firms are different groups with different objectives
(Principle/agent problem)

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37
Q

2 reasons why principle/ agent problem happens

A
  • cost of the principle punishing the agent is too high
    -information asymmetry (agent may know more what’s happening in business than principle)
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38
Q

Draw a diagram to show MR=MC

A
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39
Q

Other business objectives

A

Maximising management power
Maximising sales revenue
Satisficing
Environmental targets
Social corporate responsibility

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40
Q

How is price set in perfectly competitive markets

A

Accepts ruling market price of interaction between supply and demand and this becomes the AR=MR curve

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41
Q

Draw the diagram for short run profit max in perfect competition

A

(Pg. 64 of textbook)

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42
Q

What profit do perfectly competitive markets make in short run

A

Abnormal profits

43
Q

What does the price signal do in long run (perfectly competitive)

A

Signals to firms outside market that abnormal profits can be made and incentivises them to enter the market

44
Q

Draw the diagram for long run profit max in perfectly competitive markets

A

See page 65 in textbook

45
Q

5 step analysis of long run pc

A

Too many firms enter market shifting supply S 1-S2
This lowers the market ruling price from p1-p2 firms make subnormal profits. (Loss )
Firms begin to leave the market shifting supply left from. S2 to S3
This increases market price again p 2 to p3 where surviving firms make normal profits
They are producing on lowest point of AC curve which is most efficient (constant returns)

46
Q

Draw the short run diagram for monopoly

A

Pg 67

47
Q

2 disadvantages of monopoly

A

Market failure and resource misallocation
Firms increase its price to profit max on the AR curve
Output falls and price rises

48
Q

Draw a diagram showing how monopoly rises price and restricts output

A

Pg 67

49
Q

2 advantages of monopoly

A

Economies of scale producing at bottom of LRAC curve
Dynamic efficiency (result of technology and R&D advanacements)

50
Q

Argument that monopoly reduce promotion of innovation and efficiency

A

Likely profit satisfices not profit max

51
Q

Define productive efficiency

A

The level of output at which average costs are minimised

52
Q

Define allocative efficiency

A

Where is it possible to improve economic well-being
Price must be equal to marginal cost (P=MC)

53
Q

Why are profits lower in a competitive market

A

They are competed out by new firms entering the market attracted by the profit
The invisible hand acts as a mechanism for eliminating high profits

54
Q

Desirable properties of competitive markets

A

Economic efficiency
Welfare maximisation
Consumer sovereignty

55
Q

First degree price discrimination

A

This involves charging consumers the maximum price they are willing to pay for it
There will be no consumer surplus

56
Q

What is consumer surplusn

A

When the price is less than they are willing to pay

57
Q

Second degree price discrimination

A

This involves charging different prices depending upon the choices of the consumer
E.g. quantity,time,coupons

58
Q

Third degree price discrimination

A

This involves charging different prices to different groups of people
E.g. student discount

59
Q

Production versioning

A

Example of practicing discrimination of price offering different product options
E.g. priority tickets

60
Q

Indirect segmentation

A

Offering different products for different prices, separating consumers who are willing to pay higher prices

61
Q

Conditions necessary for price discrimination

A

Firm is a price maker
Separate markets
Different elasticities of demand
Low admin costs

62
Q

Advantages of price discrimination

A

Firms will increase revenue
Increased investment
Lower prices for some groups
Manages demand

63
Q

Disadvantages of price discrimination

A

Decline in consumer surplus
Higher prices for some groups
Administration costs
Predatory pricing

64
Q

Marginal cost in price discrimination

A

If MC is low for every extra passenger is low, the firm is incentivised to use price discrimination to sell them all, to try sell all the tickets

65
Q

2 main benefits of monopolies

A

Economies of scale
Innovation and invention

66
Q

What falls when monopolies have economies of scale

A

Long run average costs fall

67
Q

collusion

A

when rival firms agree to work together

68
Q

what does collusion do

A

lead to higher proifts and reduce competition

69
Q

negatives of cartels

A

illegal
anti competitive
against public interest

70
Q

positives of cartels

A

joint production development
cooperation to ensure product and labour standards are maintained

71
Q

example of tacit collusion

A

2008- retailers and cigarette companies colluded on price to increase profits illegally

72
Q

what does the kinked demand curve theory show

A

how a competitive oligopoly may be affected by a rivals reaction to its price and ouput decisions
it explains price rigidity and the absence of price wars in oligopolys

73
Q

why might the best policy for oligopoly be to keep prices unchanged

A

any price above p1 at the kink is demand elastic
any price below p1 at kink is inelastic
any change in price will reduce total revenue
fears an increase or a cut will likely reduce total profit

74
Q

MR curve on kinked demand curve

A

creates discontinuity
any change in MC on vertical gap wont alter profit max output
if MC was increased or cut out of vertical gap, oligopolist would have to set different price to max profits, given that accurate AR (imperfect info)

75
Q

criticisms of kinked demand curve theory

A

-no expantion of why p1,q1 on the kink in first place
-more realistic that firms test the market (increasing or decreasing price to see how rivals react)
-oligopoly prices tend to be sticky
-lower prices quickly/significantly if costs of production or demand increases

76
Q

price leadership

A

setting prices in the market by a dominant firm which is followed by other firms in a market

77
Q

price agreement

A

made between firms and their suppliers, and firms and customers regarding price of a good or a service

78
Q

price wars

A

take place in monopolistic and oligopoly, deliberalety or accidnetaly
when rival firms continuously lower prices to undercut eachother

79
Q

benefits of price wars?

A

consumers will benefit in the short run
if firms are driven out and monopoly power of surviving firms increases will lead to detriment of consumers

80
Q

consumer surplus

A

the difference between the maximum price a consumer is prepared to pay and the actual price they have to pay
market price falling = increase in consumer surplus/welfare

81
Q

producer surplus

A

the difference beyween the minimum price a firm has to charge for a good and the actual price charged

82
Q

conditions necessary for price discrimination

A
  1. must be possible to identify diferent groups- when customers differ knowledge of the market
    2.the different customer groups have different elasticites of demand - profit max by charging higher price when demand is inelastic
    3.markets seperated to prevent seepage
83
Q

seepage

A

when customers buying at the lower price in one sub market resell it iin another submarket at a price undercutting oligopolists own market selling price

84
Q

benefits of price discrimination

A

lower prices for some
spreads out demand
increased investment with extra profit

85
Q

costs of price discrimination

A

higher prices for some
decline in consumer surplus
administration costs
company profit takes higher share of GDP

86
Q

contestable markets

A

a market in which the potential exists for new firms to enter the market

87
Q

perfectly contestable market

A

no entry or exit barriers
no sunk costs
no barriers to technology

88
Q

sunk costs

A

costs incurred when entering a market that are irrecoverable

89
Q

policies suggested by the theory of contestable markets

A

removal of licensing regimes e.g tv
removal of controls over ownership
removal of price controls

90
Q

hit and run competition

A

a new entrant hits the market, makes profts then runs given that there are no barriers to entry or exit

91
Q

contestable pricing in monopoly

A

moves from AC curve to AC=AR to prevent market being contested

92
Q

consumer and producer surplus whe perfect competition is replaced by monopoly

A

monopoly raises price
monopoly gains some of the consumer surplus which wouldve existed under pc
produce surplus incraeses
there s a net los of economic welfare
amount bought and sold Q2 falls
loss of consumer and producer surplus

93
Q

form of non price competition

A

advertising/branding
brand loyalty
new productions/innovation

94
Q

dynamic efficiency in the long run (perfect competition)

A

loss of dynamic efficiency as profits are competed away by an influx of new firms into the market, and so firms cannot invest into capital, technology therefor productive potential of one firm may fall

95
Q

2 reasons perfectly competitive firms may not be efficient

A

no scope for EOS - many small firms producing relatively small amount of goods

cannot be dynamically efficient in the long run when supernormal profits get competed away

96
Q

how are perfectly competitive firms allocatively efficient

A

goods are produced as a direct respond to consumer demand (price set by market forces)
P= MC

the pressure to innovate and invest (dynamic overtime)

markets will reduce supply if more firms enter the market ensuring not to waste resources

97
Q

how are perfectly competitive firms productively efficient

A

they produce on the lowest point of the AC curve
the equilibrium profit max output is at the min AC

98
Q

features of monopolistic competition market structure

A

product differentiation (high XED of goods)
larger number of buyers and sellers that are small and act independently
no/low barrier to entry
imperfectt info

99
Q

evaluate downward sloping demand curve of monopolistic competition

A

they can raise their prices without losing customers because they have a degree of price setting power

100
Q

profit maximisation equilibrium in the short run (monopolisitic competition)

A

q1 hits mc=mr and up to AR
p1 to c1 = supernormal profits

101
Q

profit maximisation equilibrium in the long run (monopolistic competition)

A

new firms enter market incentivised by snp
demand for existing firms goods more price elastic shifts AR curve to left
only NPs made

102
Q

how might monopolistic competition firms stay in the short run to avoid losing supernormal profits

A

product differentiating and innovating

103
Q

advantages of monopolistic competition

A

allocative efficiency in short and long run (P>mc)

firms do not fully exploit factors leaving spare capacity in the market (productively inefficient)

consumer choice

more realistic than PC

sSNP in short run may contribute to dynamic efficiency

104
Q
A

economics (33 decks)

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