Perfect competition, imperfectly competitive markets and monopoly

Question 1

objective of firms

Answer 1

to maxmise sales, revenue and profit

Question 2

When is sales maxmised

Answer 2

AC=AR

Question 3

when is profit maxmised

Answer 3

MR=MC

Question 4

when is revenue maxmised

Answer 4

MR=0

Question 5

Divorce of ownership from control

Answer 5

this is when the owners are no longer in day to day control

Question 6

principle agent problem

Answer 6

this is where the principle(shareholders) pays an agent(director or employee) to act in there interests

Question 7

consequences of divorce ownership from control

Answer 7

They can act in self interest

it might bring growth as directors might be keen on growing the business

Question 8

name three conditions of perfectly competitive market

Answer 8

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

Question 9

allocative effiency

Answer 9

when a goods price is equal to what consumers want to pay

Question 10

short run and long run effects of perfect competition

Answer 10

in the long run no supernormal profits but in the short run there is to attract firms

Question 11

Conditions of monopolistic competition

Answer 11

product differentiation

price making powers

sellers demand curve downwards

no or very low barriers to entry and exit

Question 12

monopolistic competition in the short and long run

Answer 12

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

Question 13

concentrated markets

Answer 13

some industries dominated by a few companies which could be measured by concentrated ratio

Question 14

characteristics of oligopoly

Answer 14

dominated by a few firms

high barriers to entry

differientiated products

Question 15

How do oligopolies behave

Answer 15

interdependent

competitive or collusive strategy

Question 16

competitive behaviour

Answer 16

when firms dont cooperate on prices

Question 17

causes of competitive behaviour

Answer 17

lower costs

products being similar

low barriers to entry

Question 18

collusive

Answer 18

when firms cooperate with each other on prices

Question 19

formal collusion

Answer 19

involves an agreement between firms on prices

Question 20

informal collusion

Answer 20

this is when firms know its in their best interest not to compete

Question 21

causes of collusive behaviour

Answer 21

similar costs, few firms brand loyalty, high barriers to entry

Question 22

Non price competition factors

Answer 22

product differentiation, export markets, sales promotion

Question 23

How can collusion lead to monopolies

Answer 23

lead to higher prices and restricted output

no incentive for effcient production leading to market failure

Question 24

kinked demand curve

Answer 24

illustrates price stability

Question 25

assumptions in kinked demand curve

Answer 25

if one raises their prices other firms wont raise theirs if one firm lowers their prices other firms wont lower theirs

Question 26

kinked demand curve graph

Answer 26

when price increases its elastic causing a fall in demand when price decreases it inelastic as it doesnt change output

Question 27

Monopolies

Answer 27

when theres one firm in the market with 100% market share

Question 28

causes of monopoly power

Answer 28

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

Question 29

Advantages of monopolies

Answer 29

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

Question 30

disadvantages of monopolies

Answer 30

they could become complacent as theres no need to innovate or respond to consumer preferences consumer choice is limited due to lack of alternatives

Question 31

Price discrimintation

Answer 31

when a seller charges different prices to different consumers for the same product

Question 32

conditions for price discrimination

Answer 32

price making power distiguish seperate groups who have different PED(price elasticity of demand)

Question 33

First degree price discrimination

Answer 33

where each individual is charged the maxmium they would be willing to pay

Question 34

second degree price discrimination

Answer 34

where lower prices are charged to people who purchase large quantities

Question 35

third degree price discrimination

Answer 35

when a firm charges different prices for the same product to different segments of the market

Question 36

advantages and disadvantages of price discrimination

Answer 36

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

Question 37

contestability

Answer 37

how open a market is to new competitiors

Question 38

characteristics of a contestable market

Answer 38

barriers to entry are low supernormal profits can be made

Question 39

causes of high barriers to entry

Answer 39

patents-legal protection against copying production advertising created by strong brand loyalty limit pricing or price wars trade restrictions high sunk costs

Question 40

Hit and run

Answer 40

this means entering while supernormal profits can be made and leaving when its down to normal profits

Question 41

Dynamic effiency

Answer 41

improving efficiency in the long term by carrying about r&D to improve products and to invest in technology and training

Question 42

static effiency

Answer 42

if allocative effiency and productive effiency are achieved

Question 43

productive efficiency

Answer 43

this is ensuring costs of production are as low as they can be

Question 44

consumer surplus

Answer 44

the difference between the price a consumer is willing to pay for a good or service and the price they will actually pay

Question 45

producer surplus

Answer 45

is the difference between the price a producer is willing to supply and the price they will receive

Question 46

consumer surplus graph

Answer 46

the area below the demand curve and above the equilibruim line

Question 47

producer surplus graph

Answer 47

the area above the supply curve and below the equilibruim line