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AQA A-Level Economics Year 1 > Perfect Competition, Imperfectly Competitive Markets and Monopoly > Flashcards

Perfect Competition, Imperfectly Competitive Markets and Monopoly Flashcards

1
Q

What are the features of perfect competition?

A

Lots of buyers, lots of small sellers
high freedom of entry
identical/ homogenous products- more substitutes, low XED e.g. takeaway restaurants
More perfect knowledge
More independent

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2
Q

What are the features of oligopoly?

A
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3
Q

What are the market features of imperfect competition?

A

A few very large sellers
low freedom of entry
Differentiated products but doesn’t really matter
more imperfect information
Less independent-pay more attention to other producers.

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4
Q

What determines the typical behaviour of firms in a particular industry?

A

Market structures

Market structures classify industries as either imperfectly competitive or perfectly competitive.

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5
Q

What are the two main categories of market structure?

A

Imperfectly competitive and perfectly competitive

Examples of imperfectly competitive structures include monopoly and oligopoly.

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6
Q

List the key characteristics that define market structure.

A
  • Number of buyers and sellers
  • Freedom of entry and exit
  • Product differentiation
  • Degree of perfect knowledge
  • Degree of interdependence among firms
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7
Q

What is a barrier to entry in market structure?

A

Factors that deter new firms from entering a market

Barriers can include capital costs, sunk costs, scale economies, and more.

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8
Q

What are capital costs?

A

High expenses required to set up a business

An example is the cost of establishing a new mobile phone network.

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9
Q

Define sunk costs.

A

Costs that cannot be recovered if a firm exits the market

Examples include marketing and website setup costs.

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10
Q

What are scale economies?

A

Cost advantages that arise as production scales up

Industries with large economies of scale may lead to natural monopolies.

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11
Q

What are natural cost advantages?

A

Competitive advantages arising from factors like superior location

Example: A petrol station in the best town location attracting more customers.

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12
Q

What are legal barriers to entry?

A

Laws that restrict new firms from entering a market

Examples include patents and copyrights.

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13
Q

What are marketing barriers?

A

Challenges posed by existing firms with substantial marketing budgets

Heavy advertising can create brand loyalty that new entrants cannot match.

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14
Q

What are anti-competitive practices?

A

Actions taken by firms to hinder new market entrants

Examples include refusing to supply retailers that sell rival products.

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15
Q

What is perfect competition?

A

A market structure where many firms sell identical products and have free entry and exit

Characteristics include perfect knowledge and no significant barriers to entry.

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16
Q

What is an oligopoly?

A

A market structure characterized by a few firms that dominate the market

Firms in an oligopoly are interdependent, meaning the actions of one affect others.

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17
Q

What defines a monopoly?

A

A market structure where a single firm controls the entire market supply

Monopolies can arise from high barriers to entry and significant market power.

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18
Q
A
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19
Q

What is the rule for profit maximisation?

A

Set marginal revenue (MR) equal to marginal cost (MC)

This means firms produce until the last unit produced has revenue equal to its cost.

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20
Q

What assumptions are made in models of perfect competition and monopoly regarding firm objectives?

A

Profit maximisation is assumed

This is the primary objective of firms in these models.

21
Q

What are some informational difficulties firms face in achieving profit maximisation?

A

Firms may face:
* Using accounting costs instead of opportunity costs
* Difficulty estimating the demand curve
* Anticipating competitor reactions
* Uncertainty over the time period for maximisation

22
Q

What is the satisficing principle in the context of firm objectives?

A

Decision makers aim for a target level of profit rather than the absolute maximum

Firms may have multiple aims, with profit maximisation being just one.

23
Q

How does the satisficing principle influence firm behavior?

A

Firms may set minimum targets rather than maximum and can be less innovative

This occurs as managers seek to satisfy various stakeholders.

24
Q

What is the neo-Keynesian theory regarding profit maximisation?

A

Firms maximise profits in the long run rather than the short run

This theory suggests firms use a cost-plus pricing strategy.

25
Q

What is the difference between sales maximisation and revenue maximisation?

A

Sales is measured as volume, while revenue is measured as value

Managers may be judged based on sales or revenue performance.

26
Q

What are some reasons firms might aim for growth maximisation?

A

Managers gain utility from being in large firms and achieving economies of scale

Large firms may offer greater salaries and power.

27
Q

What is the principle-agent problem?

A

A situation where the shareholder (principal) employs a manager (agent) to act on their behalf

It can lead to inefficiencies due to asymmetric information.

28
Q

What are potential solutions to the principle-agent problem?

A

Solutions include:
* Increased monitoring of managers
* Linking managers’ salaries to firm profitability

29
Q

What influences the severity of the principle-agent problem?

A

The problem may be less severe in competitive markets

Managers align their goals with shareholders to ensure survival.

30
Q

Fill in the blank: Firms may have multiple aims, and these often lead to ______ behavior.

A

satisficing

31
Q

True or False: All firms aim to maximise profit as their primary objective.

A

False

Firms may pursue other objectives based on stakeholder interests.

32
Q

What can result from a firm focusing on survival?

A

Cautious and risk-averse behavior

This is particularly common for small businesses during downturns.

33
Q

What is a common pricing strategy used by neo-Keynesian firms?

A

Cost-plus pricing strategy

Firms calculate long run average costs and add a markup for profit.

34
Q

What are the two types of efficiency in economics?

A

Static and Dynamic efficiency

35
Q

What does static efficiency measure?

A

Efficiency at a point in time

36
Q

What are the two main measures of static efficiency?

A
  • Productive efficiency
  • Allocative efficiency
37
Q

What is productive efficiency?

A

Achieved when production takes place at the level of output associated with the lowest possible average cost

38
Q

At what output level does productive efficiency occur?

A

At the lowest point on the AC curve.

39
Q

What is X-inefficiency?

A

When a firm fails to minimise its costs of production

40
Q

What is the difference between productive efficiency and X-efficiency?

A

Any point on the AC curve is X-efficient, while any point above the AC curve is X-inefficient

41
Q

What defines allocative efficiency?

A

Resources are used to produce goods and services that consumers want to buy

42
Q

What is the economic definition of allocative efficiency?

A

A situation where no consumer can be made better off without making another consumer worse off

43
Q

What is the criteria for allocative efficiency in economic theory?

A

P = MC

44
Q

What does dynamic efficiency measure?

A

Whether resources are allocated efficiently over a period of time

45
Q

How is dynamic efficiency linked to allocative and productive efficiency?

A

Investment leads to new/better products or processes that consumers wish to buy or new/better process that allowed the production process to become more efficient.

46
Q

Give an example of dynamic efficiency.

A

The development of digital streaming to replace physical CDs/DVDs

47
Q

Why is dynamic efficiency used as an argument for monopoly power?

A

Monopolies may charge higher prices but invest supernormal profits into research and development

48
Q

What industry is given as an example of high prices justifying research into new medicines?

A

The pharmaceutical drug industry

AQA A-Level Economics Year 1 (7 decks)

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