Perfect competition, imperfectly competitive markets and monopoly Flashcards
objective of firms
to maxmise sales, revenue and profit
When is sales maxmised
AC=AR
when is profit maxmised
MR=MC
when is revenue maxmised
MR=0
Divorce of ownership from control
this is when the owners are no longer in day to day control
principle agent problem
this is where the principle(shareholders) pays an agent(director or employee) to act in there interests
consequences of divorce ownership from control
They can act in self interest
it might bring growth as directors might be keen on growing the business
name three conditions of perfectly competitive market
infinte number of firms
firms are price takers
consumers have full information
producers have perfect information
no barriers to entry or exit
firms are profit maxmisers
allocative effiency
when a goods price is equal to what consumers want to pay
short run and long run effects of perfect competition
in the long run no supernormal profits but in the short run there is to attract firms
Conditions of monopolistic competition
product differentiation
price making powers
sellers demand curve downwards
no or very low barriers to entry and exit
monopolistic competition in the short and long run
supernormal profits can only be made in the short run due to barriers to entry and product differentiation. in the long run only normal profit can be made
concentrated markets
some industries dominated by a few companies which could be measured by concentrated ratio
characteristics of oligopoly
dominated by a few firms
high barriers to entry
differientiated products
How do oligopolies behave
interdependent
competitive or collusive strategy
competitive behaviour
when firms dont cooperate on prices
causes of competitive behaviour
lower costs
products being similar
low barriers to entry
collusive
when firms cooperate with each other on prices
formal collusion
involves an agreement between firms on prices
informal collusion
this is when firms know its in their best interest not to compete
causes of collusive behaviour
similar costs, few firms brand loyalty, high barriers to entry
Non price competition factors
product differentiation, export markets, sales promotion
How can collusion lead to monopolies
lead to higher prices and restricted output
no incentive for effcient production leading to market failure
kinked demand curve
illustrates price stability
assumptions in kinked demand curve
if one raises their prices other firms wont raise theirs
if one firm lowers their prices other firms wont lower theirs
kinked demand curve graph
when price increases its elastic causing a fall in demand
when price decreases it inelastic as it doesnt change output
Monopolies
when theres one firm in the market with 100% market share
causes of monopoly power
barriers to entry-preventing new competition from enetering the market to compete with large profits
advertising and product differentiation-a firm may be able to act as a price maker if firms think other products are desirable
few competitors in the market-if market is dominated by a small number of firms there is gonna be price making power
Advantages of monopolies
firms can produce more due to economies of scale
in the long run it could lead to product development and improvement
increased financial security can provide stable employment
disadvantages of monopolies
they could become complacent as theres no need to innovate or respond to consumer preferences
consumer choice is limited due to lack of alternatives
Price discrimintation
when a seller charges different prices to different consumers for the same product
conditions for price discrimination
price making power
distiguish seperate groups who have different PED(price elasticity of demand)
First degree price discrimination
where each individual is charged the maxmium they would be willing to pay
second degree price discrimination
where lower prices are charged to people who purchase large quantities
third degree price discrimination
when a firm charges different prices for the same product to different segments of the market
advantages and disadvantages of price discrimination
extra revenue from consumer surplus can be used to improve products
price discrimination doesnt lead to allocative efficiency
higher prices are given to those with higher incomes
contestability
how open a market is to new competitiors
characteristics of a contestable market
barriers to entry are low
supernormal profits can be made
causes of high barriers to entry
patents-legal protection against copying production
advertising created by strong brand loyalty
limit pricing or price wars
trade restrictions
high sunk costs
Hit and run
this means entering while supernormal profits can be made and leaving when its down to normal profits
Dynamic effiency
improving efficiency in the long term by carrying about r&D to improve products and to invest in technology and training
static effiency
if allocative effiency and productive effiency are achieved
productive efficiency
this is ensuring costs of production are as low as they can be
consumer surplus
the difference between the price a consumer is willing to pay for a good or service and the price they will actually pay
producer surplus
is the difference between the price a producer is willing to supply and the price they will receive
consumer surplus graph
the area below the demand curve and above the equilibruim line
producer surplus graph
the area above the supply curve and below the equilibruim line
