Perfect Competition, Imperfectly Competitive Markets Flashcards

Question

In oligopolistic markets, firms often adopt strategic behaviors to maintain market share, limit competition, and maximize profits. These behaviors include non-price competition, cartels, price leadership, price agreements, price wars, and barriers to entry. Why there is non price competition in oligopoly market?

Answer 1

Price Wars Avoidance: Frequent price cuts can harm profits for all firms. Brand Loyalty: Differentiated products help firms build customer loyalty, making consumers less sensitive to price. Product Differentiation: Firms promote unique features, quality, or services to stand out. Advertising and Marketing: Heavy advertising boosts brand recognition and demand. Customer Service: Offering warranties, loyalty schemes, and after-sales services can attract and retain customers. Examples: Apple focusing on brand image rather than price cuts. Airlines using loyalty programs instead of fare reductions.

Answer 2

A cartel is a formal agreement between firms to control prices, output, or market share to act like a monopoly. Reasons: Higher profits: Firms collectively act like a monopoly. Reduced uncertainty: Avoids price wars and ensures stable revenue. Market control: Prevents excessive competition from lowering prices. Example: OPEC (Organization of Petroleum Exporting Countries) regulates oil production and prices. Problems with Cartels: Illegal in many countries. Incentive to cheat (firms may secretly lower prices to gain more customers). Difficult to maintain in the long run.

Answer 3

Price leadership occurs when one dominant firm sets the price, and smaller firms follow. Reasons: Avoids uncertainty: Reduces risk of price wars. Coordination without collusion: Legal way to maintain stability. Market influence: The leading firm has significant control over pricing. Examples: British Airways adjusting ticket prices, with smaller airlines following. Petrol stations setting prices based on major oil companies.

Answer 4

Firms may informally agree on a common pricing strategy to reduce competition. Reasons: Minimizes price competition: Allows all firms to earn stable profits. Maintains market balance: Prevents destructive undercutting. Simplifies pricing decisions: Reduces complexity in industries with fluctuating costs. Examples: Supermarkets aligning discount periods on similar products. Mobile phone providers offering similar contract pricing. Difference from Cartels: Price agreements are often tacit (informal) rather than explicit.

Answer 5

A price war happens when firms continuously lower prices to undercut rivals, often leading to lower profits for the entire industry. Reasons: Gaining market share: Firms want to attract more customers. Forcing competitors out: Smaller firms may struggle to survive prolonged low prices. Short-term survival: Firms cut prices during economic downturns to stay competitive. Examples: Airlines offering heavily discounted tickets in response to low-cost carriers. Supermarkets engaging in price wars on essential goods like milk and bread. Long-Term Effects: Can harm all firms if prices drop too low. Eventually leads to price stability as firms realize it’s unsustainable.

Answer 6

Barriers to entry prevent new firms from entering the market easily, helping existing firms maintain market power. Reasons: High start-up costs: Industries like car manufacturing or pharmaceuticals require huge capital investment. Economies of scale: Large firms have cost advantages over new entrants. Strong branding: Well-established firms dominate consumer preferences (e.g., Coca-Cola vs. new soft drink brands). Legal restrictions: Patents, licensing, and government regulations prevent competition (e.g., drug patents in pharmaceuticals). Predatory pricing: Large firms may temporarily lower prices to drive new entrants out of business. Examples: Tech companies using patents to block competitors. Amazon using aggressive pricing to dominate online retail.

Answer 7

Competitor pricing → If rivals keep prices stable, firms do the same to avoid price wars. Price elasticity of demand → If demand is inelastic, firms can charge higher prices. Government regulation → Price caps or antitrust laws may limit price-setting power. Cost of production → Higher costs (e.g., wages, raw materials) may lead to price increases. Collusion and cartels → Price-fixing agreements can lead to artificially high prices. Example: OPEC countries set oil prices by controlling supply.

Answer 8

Market demand → If demand rises, firms increase output. Cost structures → High production costs limit output expansion. Economies of scale → Larger firms can produce more at lower costs. Strategic behavior → Firms may restrict output to keep prices high (e.g., cartel agreements). Example: Airlines adjust flight frequencies based on passenger demand.

Answer 9

Expected profitability → Higher potential profits drive investment. Interest rates and borrowing costs → Low interest rates encourage investment. Competitive pressure → If rivals invest in new tech, firms must follow. Government policies → Tax incentives or subsidies may promote investment. Market stability → Uncertainty reduces firms’ willingness to invest. Example: Auto companies investing in electric vehicle production to remain competitive.

Answer 10

Level of competition → High competition forces firms to innovate. Potential for differentiation → Firms invest in R&D to create unique products. Government support → R&D tax credits or funding encourage innovation. Barriers to entry → Firms in industries with strong patents invest more in R&D. Example: Apple and Samsung invest heavily in R&D to develop new smartphone technologies.

Answer 11

Degree of product differentiation → More differentiation = higher ad spending. Competitor advertising → If rivals increase ads, firms must match to maintain market share. Target market size → Larger markets justify higher ad expenditures. Profitability → Firms with high profits can afford extensive marketing campaigns. Example: Coca-Cola and Pepsi engage in aggressive advertising to maintain brand dominance.

Answer 12

Pricing Decisions → Firms in an oligopoly often follow the pricing strategies of dominant competitors to avoid price wars and maintain market stability. For instance, if one firm reduces its prices, others may follow to maintain their market share. Non-Price Competition → Firms may focus on non-price competition (such as advertising, product differentiation, and customer service) rather than engaging in price competition, as lowering prices could lead to reduced profits for all. Collusion and Cartels → Firms may engage in collusion, either tacit or explicit, to set prices or output levels to maximize collective profits, though this is illegal in many jurisdictions. Kinked Demand Curve → Firms are often reluctant to change prices because they believe rivals will either match price cuts or ignore price increases, which can lead to price rigidity in oligopolistic markets. Example: The pricing behavior of major airlines often reflects the interdependence between them. If one airline lowers its fares, competitors may match it to avoid losing customers.

Answer 13

Price Setting → The uncertainty in how competitors will respond to changes in price or output makes it difficult for firms to determine the optimal strategy. Investment Decisions → Firms may delay or hesitate to invest in new technology or capacity expansion, as they are unsure how rivals will react. Game Theory → Firms use game theory to model and predict competitive behavior, but uncertainty still exists in predicting the outcomes of strategic decisions. Example: In the smartphone industry, companies like Apple and Samsung often keep product developments secret to avoid revealing their strategies to competitors.

Answer 14

1. Economies of Scale → Large firms benefit from economies of scale, which can lead to lower production costs and cheaper goods for consumers. 2. Innovation and R&D → The competition within oligopolies often drives innovation, as firms seek to differentiate their products and gain a competitive edge. 3. Stable Prices → Due to interdependence and collusion, oligopolies can lead to more stable prices compared to highly competitive markets, benefiting both firms and consumers. 4. Higher Profitability → Oligopolistic firms often enjoy higher profits due to their market power and ability to influence prices. This profitability can be reinvested in technological advancements and product improvements. Example: The automobile industry often benefits from economies of scale, allowing firms like Ford and Toyota to produce vehicles at lower costs while investing in new technologies and innovations.

Answer 15

1. Price Rigidity → In oligopolies, prices tend to be sticky, leading to higher-than-competitive prices and potentially reduced consumer welfare. 2. Collusion → Firms may engage in collusion, either tacit or explicit, leading to price-fixing or reduced competition, which can harm consumers and lead to market inefficiencies. 3. Limited Consumer Choice → With only a few firms controlling the market, there may be fewer choices for consumers, especially in terms of product variety. 4. Barriers to Entry → High barriers to entry (such as significant capital investment or economies of scale) may prevent new firms from entering the market, reducing competition and innovation. 5. Inefficiency → Oligopolies may lead to productive and allocative inefficiency, as firms can produce at less-than-optimal output levels, reducing the overall efficiency of resource allocation in the market. Example: The telecommunications industry in many countries is dominated by a few large firms, which can lead to high prices and limited service options for consumers.

Answer 16

1. Barriers to Entry: High barriers, such as high startup costs, legal restrictions, or control over essential resources, prevent new firms from entering the market. This strengthens the monopoly power of existing firms, as they face little to no competition. 2. Number of Competitors: The fewer the competitors in the market, the more monopoly power a firm has. A monopoly typically has no direct competition, allowing it to set prices and control output without fear of losing customers to rivals. 3. Advertising: Strong advertising can differentiate a product, build brand loyalty, and reduce the likelihood of consumers switching to alternatives. This enhances monopoly power by making the firm less vulnerable to competition, even if other firms exist in the market. 4. Degree of Product Differentiation: The more a firm can differentiate its product (e.g., through quality, features, or branding), the greater its monopoly power. Consumers may perceive the product as unique and not easily substituted, which allows the firm to maintain higher prices and control the market.

Answer 17

1. Economies of Scale: Monopolies often produce goods on a large scale, which can lead to significant cost savings (economies of scale). This allows them to lower production costs per unit, potentially resulting in lower prices for consumers (though not always passed on). 2. Incentive for Innovation: With little competition, monopolies may have the financial resources to invest in research and development, leading to innovations in products, services, or production methods. This can lead to new technologies or improvements that benefit society. 3. Stable Prices: Monopolies can offer price stability since there is no competition to force price fluctuations. This can provide predictability for consumers and businesses in long-term planning. 4. Long-Term Investment: With guaranteed market share and profits, monopolies are more likely to invest in long-term projects (e.g., infrastructure, development) that may not be viable in competitive markets. 5. Control Over Resources: In cases where monopolies control essential resources (e.g., natural resources or infrastructure), they can ensure the efficient distribution of these resources to avoid shortages or waste.

Answer 18

1. Higher Prices for Consumers: Monopolies can set prices higher than in competitive markets because they have no competition to constrain them. This leads to reduced consumer welfare as prices are not driven down by market forces. 2. Inefficiency: Without competition, monopolies have little incentive to operate efficiently. This can result in productive inefficiency (higher-than-necessary costs) and allocative inefficiency (misallocation of resources), as they may produce less than the socially optimal quantity. 3. Reduced Innovation: Although monopolies can innovate, they may have less incentive to do so once they dominate the market. Without competitive pressure, the motivation to improve products or services may decrease over time. 4. Lack of Consumer Choice: A monopoly limits the variety of products and services available to consumers, reducing their options and potentially leading to dissatisfaction. 5. High Barriers to Entry: Monopolies often create or reinforce high barriers to entry, making it difficult for new firms to enter the market. This limits competition, innovation, and the potential for lower prices in the long run. 6. Exploitation of Consumers: In extreme cases, monopolies may exploit their market power to take advantage of consumers, such as through price gouging, inferior product quality, or poor customer service, as they face no pressure from competitors.

Answer 19

1. Market Power (Monopoly or Monopoly Power): The firm must have some degree of market power, meaning it can set prices rather than simply accepting the market price. This is typically seen in monopolies or firms operating in monopolistic competition. 2. Ability to Segment the Market: The firm must be able to segment the market into distinct groups based on factors like income, age, location, or time of purchase. These groups should have different price sensitivities (elasticities of demand). 3. Prevention of Resale: The firm must be able to prevent or limit the resale of goods between different market segments. If consumers in one segment could easily resell to consumers in another segment, it would undermine the ability to charge different prices. 4. Different Price Elasticities of Demand: The firm must identify groups with different price elasticities of demand. For example, students or elderly individuals might be more price-sensitive (elastic demand), while business customers may have less price sensitivity (inelastic demand). 5. Barriers to Entry: There should be barriers preventing other competitors from entering the market to offer lower prices or undercutting the firm. This allows the firm to maintain its market segmentation and price discrimination strategy.

Answer 20

1. Increased Revenue for the Firm: Price discrimination allows firms to capture more consumer surplus and convert it into producer surplus, potentially increasing their total revenue compared to charging a single price for all customers. 2. Improved Access to Goods and Services: By charging different prices to different groups, firms can make their products more affordable to lower-income consumers (e.g., student or senior discounts), improving access to goods or services that might otherwise be out of reach. 3. Market Segmentation: Price discrimination helps firms to segment the market based on demand elasticity, allowing them to better match pricing strategies to different consumer needs, maximizing profits. 4. Promotes Efficiency in Some Cases: In some industries, price discrimination allows firms to recover fixed costs more effectively, leading to the ability to offer products to consumers at a lower price overall. This is often seen in industries with high fixed costs, like airlines or cinemas. 5. Encourages Innovation and Investment: With increased profitability from price discrimination, firms may have more resources to invest in research, development, and innovation, benefiting consumers in the long term.

Answer 21

1. Consumer Exploitation: Consumers who are charged higher prices may feel they are being unfairly exploited. Price discrimination can lead to perceptions of inequity, particularly if some groups face significantly higher prices for the same product or service. 2. Potential for Inefficiency: Price discrimination can result in allocative inefficiency if some consumers who would have purchased the product at the single market price are excluded due to higher prices in certain segments. 3. Administrative Costs: Implementing price discrimination requires segmenting markets, monitoring consumer behavior, and potentially incurring additional administrative costs to enforce the pricing structure. 4. Decreased Consumer Surplus: By charging different prices to different groups, the firm is able to capture more consumer surplus, which decreases the total welfare for consumers who are paying higher prices than they would have in a single-price market. 5. Encourages Market Fragmentation: Price discrimination can lead to market fragmentation, where certain consumer groups are excluded from particular products or services because they cannot afford the higher prices. This can reduce overall market efficiency.

Answer 22

Airlines often charge different prices for the same flight depending on factors such as the time of booking, the class of service (economy, business, first class), and the flexibility of the ticket. Last-minute bookings typically have higher prices compared to tickets booked well in advance. Impact on Producers: Airlines can maximize revenue by charging higher prices to consumers with inelastic demand (e.g., business travelers) while offering lower prices to more price-sensitive consumers (e.g., leisure travelers). Impact on Consumers: Consumers benefit from lower fares if they are flexible and book early, but they may feel unfairly treated if they are forced to pay high last-minute prices. Price-sensitive consumers gain, but others may pay more than they would in a uniform pricing system.

Answer 23

Many cinemas offer discounted tickets for students, seniors, or off-peak showtimes, while charging higher prices for prime-time screenings. Impact on Producers: Movie theaters can increase overall revenue by appealing to different segments of the market. They attract budget-conscious groups like students and seniors while also capturing revenue from individuals willing to pay more for the prime viewing experience. Impact on Consumers: Consumers who are part of the discount groups (e.g., seniors or students) benefit from lower prices, while others may feel they are paying a premium for the same product, potentially leading to dissatisfaction.

Answer 24

1. Lower Prices for Consumers: In the short run, competition among firms typically leads to lower prices. When firms compete, they are incentivized to undercut each other to attract customers, which can result in reduced prices for consumers. 2. Increased Product Variety: Firms may differentiate their products to gain a competitive edge, offering a wider range of choices for consumers. 3. Improved Efficiency: Competition forces firms to become more efficient in their production processes to reduce costs and maintain profitability. This might involve better resource allocation and streamlined operations. 4. Innovation and Technological Advancements: In a competitive environment, firms are motivated to innovate and improve their products to maintain market share. This can lead to the introduction of new technologies and product features.

Answer 25

1. Economic Growth: The continuous pressure from competition can foster long-term innovation, which contributes to economic growth. Firms strive to innovate, leading to new products, industries, and services. 2. Productivity Improvements: Firms in competitive markets must constantly improve their productivity to survive. This drives technological advancements and efficiency gains over time, benefiting both firms and consumers. 3. Lower Consumer Prices and Better Quality: Over time, the benefits of competition accumulate, resulting in lower prices and better-quality goods and services as firms constantly strive to outdo each other. 4. Resource Allocation Efficiency: Long-term competition can lead to a more efficient allocation of resources, as firms seek to invest in areas that are most profitable and beneficial to consumers, contributing to overall welfare.

Answer 26

1. Product Improvement: Firms may compete by continuously improving their products. This could include enhancing features, design, or functionality. For example, tech companies often release updated versions of smartphones with improved features to differentiate from competitors. 2. Cost Reduction: To remain competitive, firms may focus on reducing production costs without sacrificing quality. This can be achieved through innovations in production processes, supply chain management, and economies of scale. 3. Service Improvement: Firms may also compete by offering superior customer service, such as faster delivery, better customer support, or personalized services, to attract and retain customers. 4. Marketing and Branding: Firms compete on the basis of branding, advertising, and marketing strategies to create consumer loyalty and differentiation. This is particularly common in industries where products are largely homogeneous, like fast food or fashion.

Answer 27

How it Works: In a competitive market, firms innovate to capture market share, but in doing so, they may introduce technologies or products that render existing ones obsolete. For example, the rise of digital photography led to the decline of traditional film cameras. Impact on Firms: Old Firms: Firms that fail to adapt to new technologies or market demands are “destroyed” or pushed out of the market. This could result in bankruptcies, mergers, or closures. New Firms: New firms that introduce groundbreaking technologies or business models often replace outdated firms, which fuels economic dynamism and encourages continued investment in research and development. Impact on Consumers: Positive Effects: Consumers benefit from lower prices, better-quality products, and new technologies that emerge as a result of competition and innovation. Negative Effects: Some consumers may face short-term disruptions as older firms close, or they may feel the effects of losing a familiar product or service. Workers in displaced industries might also experience job losses in the short term. Example: The emergence of streaming services like Netflix, Amazon Prime, and Spotify has replaced traditional media consumption methods like DVDs, CDs, and cable TV. While consumers benefit from greater convenience and lower prices, traditional media companies have struggled to adapt to the new digital economy.

Answer 28

Monopoly power refers to a firm’s ability to dominate a market, set prices, and earn supernormal profits due to a lack of competition. These high profits can act as a signal for new firms to enter the market. However, barriers to entry such as patents, technological advantages, and high start-up costs can make it difficult for new competitors to break into the market. It depends on the market structure, monopolistic market would be easier to break into. New firms may enter the market with innovative products, reducing the monopoly’s dominance by improving efficiency and offering better alternatives. This disrupts the monopoly’s market power and leads to increased competition and create destruction. Over time, this competitive pressure forces monopolistic firms to adapt or lose market share, benefiting consumers through lower prices, improved product quality, and more consumer choice. The process ensures that markets remain dynamically efficient, promoting continual innovation.

Answer 29

Market contestability refers to the degree to which a market is open to competition. It is the potential for new entrants to challenge existing firms, even if those firms currently dominate the market. The more contestable a market, the more pressure there is on incumbent firms to act efficiently, even if they don’t face immediate competition. This is because the threat of new firms entering the market can drive firms to lower prices, improve quality, and innovate to maintain their market share. A contestable market has the following characteristics: Low barriers to entry and exit: It is easy for new firms to enter the market and compete, and it’s also easy for firms to exit without incurring significant costs. Potential competition: Even if no new firms have entered the market yet, the mere possibility of competition can discipline existing firms and prevent them from acting like monopolies.

Answer 30

These are costs that cannot be recovered once they are incurred, such as investments in specialized equipment or advertising. High sunk costs can create barriers to entry, making it more difficult for new firms to enter a market. When sunk costs are low, new firms are more likely to enter, making the market more contestable.

Answer 31

This refers to the behavior of firms that enter a market, exploit the profit opportunities by undercutting prices or offering new products, and then quickly exit once they’ve gained their profits. This can occur in highly contestable markets where the threat of potential competition forces incumbent firms to lower prices or improve products to prevent new entrants from exploiting the market.

Answer 32

Static Efficiency refers to the efficiency in the allocation of resources at a given point in time. It involves: - Productive efficiency: The firm produces at the lowest possible cost (minimizing average total costs), utilizing resources in the most efficient way without waste. - Allocative efficiency: Resources are allocated in a way that maximizes social welfare, i.e., the price of a good equals the marginal cost (P = MC). This ensures that the value consumers place on a good is equal to the cost of producing it. - Static efficiency typically describes the performance of a market in the short run. Dynamic Efficiency refers to the efficiency over time, focusing on improvements in technology and innovation. It involves: - Research and development (R&D): Investment in new technologies or improvements in existing products. - Investment in human capital: Education and training that enhance the skills and productivity of workers. - Technological change: Adoption of new technologies that improve productivity and reduce costs over time. - Dynamic efficiency improves market outcomes in the long run by fostering innovation and productivity growth

Answer 33

Productive Efficiency: A firm is productively efficient when it produces at the lowest possible cost, which occurs when it operates at the point where average total cost (ATC) is minimized. This is achieved through cost minimization and effective use of available resources. Firms need to choose the most efficient production techniques and ensure that inputs are used optimally. Allocative Efficiency: Allocative efficiency is achieved when the price of a good or service equals the marginal cost (P = MC). This ensures that resources are allocated where they are most valued by consumers. When P = MC, the value that consumers place on a good is equal to the cost of producing it, leading to an optimal allocation of resources across the economy.

Answer 34

Dynamic efficiency is focused on improving the productive capabilities of firms over time and is driven by factors like: 1. Research and Development (R&D): Firms engage in R&D to discover new technologies, improve existing processes, and create new products. This leads to technological advancements that make production more efficient. 2. Investment in Human and Non-Human Capital: Investment in human capital, such as training and education, increases the skills and productivity of the workforce, which contributes to better outcomes. Non-human capital, like machinery, infrastructure, and technology, also plays a significant role in improving production processes. 3. Technological Change: As firms adopt new technologies, they can reduce costs, improve quality, and increase efficiency. Over time, this leads to long-run dynamic efficiency, where firms continually innovate to stay competitive.

Answer 35

Consumer Surplus (CS): The difference between what consumers are willing to pay for a good or service and what they actually pay. It represents the benefit or utility that consumers receive from purchasing a product at a price lower than what they were prepared to pay. Formula: CS = Willingness to Pay - Price Paid. Producer Surplus (PS): The difference between the price at which producers are willing to sell a good (i.e., their minimum acceptable price) and the price they actually receive. It reflects the benefit producers get from selling at a price higher than their minimum acceptable price. Formula: PS = Price Received - Willingness to Accept (Minimum Price)

Answer 36

Economic efficiency involves maximizing total surplus in a market, which is the sum of consumer surplus and producer surplus. The allocation of resources is said to be efficient when it maximizes the total welfare (sum of consumer and producer surplus). Allocative Efficiency: Occurs when the price equals the marginal cost (P = MC), ensuring that the amount of a good produced matches the amount that consumers are willing to buy at that price. At this point, total welfare (total surplus) is maximized. At P = MC, consumer and producer surpluses are maximized, and there are no unexploited gains from trade in the market. Productive Efficiency: Occurs when goods are produced at the lowest possible cost, typically at the minimum point of the average cost curve. While this ensures the goods are being produced in the most cost-effective way, it alone does not guarantee the best outcome in terms of consumer welfare if the allocation of resources is inefficient.

Answer 37

In situations where markets are not perfectly competitive (e.g., in monopolies, oligopolies, or where externalities exist), the total surplus may not be maximized, leading to deadweight loss (DWL), which represents the lost welfare that occurs when the market does not operate at the allocatively efficient point. Monopoly: In a monopoly, the producer typically restricts output to raise prices and maximize profits. This reduces the consumer surplus, while the producer surplus may increase. However, the total surplus in the market is reduced due to the deadweight loss, as fewer transactions are occurring than in a perfectly competitive market. Externalities: If there are positive or negative externalities (e.g., pollution or the benefits of education), the market equilibrium will not maximize total surplus. For example, a negative externality like pollution creates a social cost that is not reflected in the price, leading to a reduction in total welfare.

Answer 38

Price Controls (Price Floors and Price Ceilings): Price floors (e.g., minimum wage laws) can create surpluses (excess supply), where producers want to supply more than consumers are willing to buy at the higher price, leading to inefficiency and deadweight loss. Price ceilings (e.g., rent controls) can create shortages (excess demand), where consumers want to buy more than producers are willing to supply at the lower price, again leading to inefficiency and deadweight loss. Taxation and Subsidies: A tax on a good reduces the consumer surplus (due to higher prices) and producer surplus (due to lower prices received), and causes deadweight loss because it reduces the quantity of transactions. A subsidy increases the quantity of transactions and shifts the supply or demand curve, benefiting consumers (increased consumer surplus) and producers (increased producer surplus), but may also result in inefficiency if it distorts market equilibrium.

Answer 39

Conduct Indicators used to reflect how firms behave: Pricing Behavior: In perfect competition, firms are price takers, while in monopolies and oligopolies, firms may have some degree of pricing power. In monopolistic competition, firms have some discretion over pricing due to product differentiation. Product Differentiation: This is a key feature in monopolistic competition and oligopoly. Firms in these markets engage in non-price competition, which can lead to product innovation and advertising. Collusion and Price Fixing: In oligopolies, firms may engage in tacit collusion or explicit cartel behavior to fix prices or output levels. In monopolies, there is no competition, so firms naturally set prices higher than in more competitive markets.

Answer 40

Performance Indicators used to reflect how well they perform relative to efficiency standards: Efficiency Indicators: Measures such as allocative efficiency (P = MC) and productive efficiency (output at the lowest average cost) help assess how well resources are being used in each market structure. Profitability: Monopolies and firms in oligopolistic markets generally earn higher profits than firms in perfect competition or monopolistic competition, which may struggle to earn supernormal profits in the long run. Innovation: Firms in monopolistic competition and oligopoly may invest in R&D to differentiate their products or maintain competitive advantage, whereas firms in perfect competition are less likely to innovate due to the lack of profit incentives. Consumer Welfare: In terms of welfare, perfect competition typically maximizes consumer surplus due to low prices and efficient allocation of resources. In monopolies and oligopolies, consumer surplus is generally reduced due to higher prices and reduced output.

Answer 41

Perfect Competition: Efficiency: Maximizes static efficiency (allocative and productive efficiency). Welfare: Consumer welfare is maximized, and there is no deadweight loss. Monopoly: Efficiency: Allocative and productive inefficiencies due to price being greater than marginal cost (P > MC). Welfare: Leads to a deadweight loss, where both consumers and society lose welfare compared to a perfectly competitive market. Monopolistic Competition: Efficiency: Lacks both allocative and productive efficiency. Welfare: There is some deadweight loss, though less than in a monopoly. Consumer welfare is reduced due to higher prices and lower output. Oligopoly: Efficiency: Mixed results. Firms may engage in tacit collusion or non-price competition, leading to inefficiency. Welfare: Similar to monopolistic competition, but possibly with more potential for deadweight loss in cases of collusion or pricing above marginal cost.

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Perfect Competition, Imperfectly Competitive Markets Flashcards

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