Perfect Competition, Imperfectly Competitive Markets and Monopoly

Question 1

perfect competition profits in the long and short run

Answer 1

short run can make supernormal profits, but only ever normal profits in the long run

Question 2

what does marginal revenue equal in perfect competition diagram and why

Answer 2

average revenue, but of the lack of price differentiation, everything is the same price so pricing is totally elastic

Question 3

how are supernormal profits found in perfect competition in the short run

Answer 3

because there are no barriers to entry

Question 4

where is the point of profit maximalisation

Answer 4

marginal costs = marginal revenue

Question 5

why are supernormal profits not possible in perfect competition markets in the long term

Answer 5

because the market is so desirable for new firms (due to no barriers to entry), and because there is no price differentiation nor brand loyalty or identity, so price mechanism and economies of scale move equilibrium to the point of normal profits, and because of the total elasticity, market is stuck there

Question 6

how does the price mechanism force a firm in perfect competition to normal profits

Answer 6

because cant compete with price in perfect competition, they will instead compete with costs of production, or cost wars, so firm will reduce amount produced because of the flooding of the market (low barriers to entry) and they will eventually lower costs

Question 7

what are cost wars

Answer 7

when firms in a market try to undercut each other and get the lowest costs of production possible

Question 8

characteristics of a market structure

Answer 8

number of firms
differentiation of goods
pricing power
profit maximalisation
entry and exit barriers
efficiency

Question 9

abbreviation to remember the characteristics of a market structure

Answer 9

no perfect princes eat enough eggs (much shame)

Question 10

characteristics of perfect competition

Answer 10

unlimited / high number of firms
productively efficient (because of cost wars)
allocatively efficient in the long run
no pricing power
identical goods
profit maximiser
low entry and exit barriers

Question 11

what point is productively efficient

Answer 11

lowest point on the average cost curve

Question 12

what point is allocative efficiency

Answer 12

price = marginal costs (they price the good at the cost of it

Question 13

pros of perfect competition

Answer 13

allocatively and productively efficient in the long run

lots of choice to maximise utility

lower prices because of competition

quality of good raised because of competition

choices according to preference’s
perfect information

Question 14

cons of perfect competition

Answer 14

no product differentiation

supernormal profits are diminished

• no dynamic efficiency (consumers lose out on innovation)

cutting costs may reduce quality

cutting costs may lead to negative production externalities (e.g. fossil fuels or cuts in health and safety equipment)

lots of firms enter and leave, no market continuity

Question 15

dynamic efficiency

Answer 15

when firms use supernormal profits to reinvest in the firm/product

Question 16

barriers to exits examples

Answer 16

sunk costs (cant be recovered)
(advertisers)

contractual obligation

impact on reputation

redundancy costs
(paying employees to lay off)

Question 17

barriers to entry examples

Answer 17

costs of factors of production (capital, enterprise, labour, land)

economies of scale
(cant compete w bigger firms because they can exploit economies of scale, because smaller firms simply cant output or supply that much, so have much larger marginal costs)

high startup costs
(patents
technology
scarcity of recourses)

legal barriers

brand loyalty and identity

anticompetitive practices
(non price competition, e.g. tesco advertising they are cost matching lidl)

Question 18

examples of non price competition / anti competitive practices

Answer 18

loyalty cards

advertising dragging down a different firm

Question 19

collusion meaning

Answer 19

when all big firms agree to do something, so they all exploit consumers and win together

Question 20

characteristics of monopolistic competition

Answer 20

high number of firms
small amount of differentiation
price makers, but not like monopolies
profit maximisers
pretty low barriers to entry
productively and allocatively efficient in the long and short run, dynamically efficient in the short run

Question 21

examples of types of markets that are monopolistic

Answer 21

clothing brans, hair dressers, barbers, night clubs, takeaways (high street shops)

Question 22

types of firms in a monopolistic markets

Answer 22

all offer the same type of service/products and there is a high number of them, but they offer differentiation within their product

Question 23

monopolistic profits in the short run

Answer 23

room for supernormal because of the price differentiation of the market

the price making power in the short run = potential supernormal profits

Question 24

monopolistic characteristics in the short run

Answer 24

productively efficient

supernormal profts

profit maximalisting at MC = MR

not allocatively efficient (price ≠ mc, in this case p > mc)

dynamically efficient

Question 25

monopolistic short run diagram

Answer 25

average revenue slightly higher than marginal revenue (both neg relationship with price) at any price, hits MR and thats the output however the output line goes up to AR, the difference between equilibrium at AR vs MR = room for price making, and potential for supernormal profits

Question 26

why cant monopolistic firms stay supernormal in the long run

Answer 26

low barriers to entry, differentiated goods, price makers = price competition price competition and low barriers to entry lead to lowering of prices to normal profits to stay competitive

Question 27

monopolistic market in long run firm

Answer 27

point where AC = AR same point where MC =MR becomes output level, equilibrium where that output line meets AC

Question 28

why do monopolistic firms end up with normal profits

Answer 28

low price to stay competitive, as price competition is key in monopolistic markets and costs rise (e.v. advertising, or increasing labour / stock) QD decreases due to high number of firms joining the market

Question 29

order of market structures from most perfect to most monopoly like

Answer 29

perfect competition, monopolistic competition, oligopoly, monopoly

Question 30

interdependency in markets

Answer 30

reactive to each others actions

Question 31

what does interdependency lead to

Answer 31

imperfect level of competition

Question 32

characteristics of an oligopoly

Answer 32

few dominant firms rigid/sticky prices (price making but interdependant) differentiated products due to branding / advertising / price level profit maximisers (mc=mr) barriers to entry are high (high investment costs + economies to scale + need non price competitively factors) allocatively inefficient (p > mc) dynamically + productively efficient rely on non price competition

Question 33

imperfect level of competition

Answer 33

In an imperfectly competitive environment, companies sell different products and services, set their own individual prices, fight for market share, and are often protected by barriers to entry and exit, making it harder for new companies to challenge them.

Question 34

sticky prices in oligopoly

Answer 34

cant / choose not to raise prices above a certain price level to avoid losing profit (kinked demand curve)

Question 35

examples of non price competition in oligopoly

Answer 35

collusion anticompetitive behaviour marketting

Question 36

why are oligopolies so reluctant to compete via price

Answer 36

due to sticky prices and fear of price wars, just leading to decreased profit all around

Question 37

game theory

Answer 37

study on decision making, when you make a decision it makes outcomes on different people

Question 38

example on game theory

Answer 38

2 firms collude by both setting on a high price, which would increase both their profit margins // the prisoners dilema (both have option to raise or lower price, if both raise they make more profit than if both lower... but if one lowers and one raises the firm that lowered will get even more profit - incentive to cheat / win in the long run, one will always lower price, making the other one lower to price match- making both lose profit margins)

Question 39

parato optimum

Answer 39

Pareto optimality is the state at which resources in a given system are optimized in a way that one dimension cannot improve without a second worsening. e.g. two friends sharing a bag of candy, each receiving only the candies they prefer. This is because no one can be made better off without making the other worse off, even though the distribution might not be equa

Question 40

nash equilibrium

Answer 40

scenario that can hold in the long run

Question 41

kinked demand curve for oligopoly

Answer 41

two kinked line, ar = d on top and mr parallel below mr and ar start elastic, then mr has a drop along the q line, and both lines change into inelastic sometimes tick shaped mc curve

Question 42

lack of price competition in oligpolies

Answer 42

will instead look to compete at reducing costs and non price competition

Question 43

example of oligopolies reducing costs as competition

Answer 43

budget airline industry

Question 44

example of oligopolies non price competition

Answer 44

branding and advertising mergers and acquisitions (e.g. supermarkets also providing petrol stations + loyalty schemes + clothes) collusion (illegal or legal)

Question 45

why do oligopolies use non price competition

Answer 45

to prevent a price war and lose revenue

Question 46

price war

Answer 46

a competitive exchange among rival companies who lower the price points on their products, in a strategic attempt to undercut one another and capture greater market share

Question 47

competition commision

Answer 47

there to keep things fair and ensure the firms stay allocatively efficient (look after the consumers)

Question 48

example of oligopoly not being a profit maximiser

Answer 48

lush dont use animal testing, which can be more expensive/not industry standard, however leads to consumers switching to lush because of morals end up gaining more profit from it, just not from the price mechanism / free market

Question 49

non price competition of following trends example

Answer 49

tescos and morrisons making a vegan brand in the late 2010s when veganism was trendy lifestyle choice

Question 50

collusion

Answer 50

anti competitive behaviour, agreement between 2 or more parties to act in a certain manner, can be explicit (open) or closed

Question 51

oligopoly cartel

Answer 51

act together to increase or maximise joint profits

Question 52

example of oligopoly cartel

Answer 52

virgin airline and british airways agreed on price for the cost of NYC to London got caught and dined

Question 53

two types of collusion in oligopolies (depending on supply chain)

Answer 53

horizontal - 2 firms at the same stage of production (e.g. 2 airlines or 2 supermarkets) vertical - when you control the supply chain (e.g. tescos setting a set price with farmers, but telling them they have to sell at a higher rate to other supermarkets)

Question 54

benefits to colluding

Answer 54

joint profits increase reducing costs (vertical w costs of production, and horizontal with non price competition) increase market share / control removes uncertainty on interdependancy (higher profits and increased shareholder value as less drops in profit/value)

Question 55

who decides if collusion can be legal, and why would they decide it

Answer 55

corruption market authority (cma) might allow collusion if it will improve the product / the distribution of goods, or improve technical progress in the uka or if it will develop industry standards, e.g. mobile phone chargers or if it will improve information sharing, e.g. insurance companies share details easily to prevent imperfect information from the consumer (life insurance usually) also to be approved for joint research ventures, 2 firms arent allowed to work together if there market share is > 25% - but can still make new products and sell for 7 years with almost no competition

Question 56

case study of legal collusion to improve industry standards

Answer 56

mobile phone chargers because companies making cheap chargers to undercut big phone companies, cut costs, led to chargers exploded eu set law that chargers all had to meet certain standards and all devices would have to have the same charger to reduce waste and decrease consumption of chargers, keeping chargers accessable even with the lack of budget charger options

Question 57

disadvantages of collusion

Answer 57

can break apart super easily (prisoner dilema example + profit maximising usually comes from undercutting competition) raise barriers to entry / unfair not allocatively efficient

Question 58

evaluation of oligopolies

Answer 58

benefits depend on how the oligopoly operates (if it colludes; similar benefits and downsides to a monopoly, if it stays competitive than similar benefits and downsides to perfect competition/monopolistic)

Question 59

what market share does a firm need in the uk to be a monopoly

Answer 59

25%

Question 59

characteristics of monopolies

Answer 59

1 dominant firm differentiated goods price makers profit maximiser dynamically efficient but not allocatively nor productively high barriers to entry and exit supernormal profits in both sr and lr

Question 60

are monopolies legal

Answer 60

no, unless natural

Question 61

example of government preventing firms merging to form monopolies

Answer 61

ee mobile used to be orange and t mobile, had to merge outside of the uk in europe

Question 62

why are monopolies allocatively and productively inefficient

Answer 62

x efficiency

Question 63

x efficiency

Answer 63

wastage of recourses

Question 64

how do monopolies make supernormal profits (based on rational choice)

Answer 64

consumers have imperfect information and limited choice cant make ration choices firms exploit the asymmetric information and change to higher prices

Question 65

where is the supernomral profit in a monopoly diagram

Answer 65

output at point of cross over of MC and MR, go up until AC then vertical line out, same with AR. vertical lines of AC and AR make a box, which reflects the supernormal profits

Question 66

supernormal profits

Answer 66

disparity between price and costs (allocatively inefficient + not productively efficient)

Question 67

result of monopolies supernormal profits

Answer 67

leads to market failure because exploiting the consumer and not being productively efficient is market failure (social equilibrium not matching the free market equilibrium?) however does mean the firm can reinvest (dynamic efficiency) which can increase efficiency and means they *could* decrease price without decreasing supernormal profit margin (better for consumers?)

Question 68

advantages of monopolies (for firms)

Answer 68

supernormal profits allow for dynamic efficiency (increased potential for innovation) profit maximiser elimnating non price competition (not wasting recourses + cutting costs which can have neg prod ext.) dont have the uncertainty of game theory and interdependance (can plan for long term cross subsidisatio

Question 69

cross subsidation

Answer 69

profits from 1 side of a firm can subsidise other areas of the firm, e.g. postal services charger more to deliver in rural areas so people in the rural areas can receive goods at the same price (only possible with price taking firms)

Question 70

benefits for consumers of monopolies

Answer 70

better quality and usually more innovative potentially lower price because of exploitation of economies of scale leading to decreased costs constant supply of essential goods - monopolies are quite stable (e.g. water and electricity firms) avoid wasteful competition (remove noise from advertisement everywhere, clearer view on what the good is- prevents harmful advertising for exposure)

Question 71

drawbacks of monopolies (for firms)

Answer 71

lack of innovation can occur due to complacency (no incentive to innovate, so firms just keep supernormal profits for shareholders) x efficiency - waste recourses, (e.g. way more managers than they need to have) - not profit maximising or not streamlining recourses

Question 72

drawbacks of monopolies (for consumers)

Answer 72

allocatively inefficient (higher price to explot consumer + can restrict output) lack of choice - lack of output / competition deincentivies variety and choices of product differentiation because market is differentiated enough may suffer poor quality / service because of lack of competition (e.g. wait times at the GP) consumer exploitation, can price discriminate to disadvantage some groups to profit maximise

Question 73

price discrimination and requirements

Answer 73

firms change different prices to different consumers to make more revenue 3 degrees needs monopoly power in a firm market / consumers need to be able to be split into 2 elasticities no market seepage (products aren't transferable between people) (e.g. cinema tickets)

Question 74

what are the 3 degrees of price discrimination

Answer 74

1st degree - charges you at highest price then you could haggle (e.g. phone data plans) 2nd degree - charges you depending on how much you buy (e.g. bulk buying / buy one get one free) 3rd degree - firm changes different press depending on their elasticity group (e.g. train tickets on peak time (inelastic) vs non peak time (elastic))

Question 75

what does 2nd degree price discrimination rely on

Answer 75

irrationality (not enough time, intellect or information to make a rational choice)

Question 76

benefits of price discrimination

Answer 76

depend on what degree and whether you are the one winning or losing, to whether and how much you benefit

Question 77

drawbacks of price discrimination

Answer 77

bad for consumers, there are winners and losers - not equal

Question 78

characteristics of contestable markets

Answer 78

1 or many dominant firms differentiated or similar products price makers not takers profit maximisers low barriers to entry can be allocatively and x efficient (depends) but is productively efficient

Question 79

contestable markets problem

Answer 79

Contestable markets face actual and potential competition. Entrants to contestable markets have free access to production techniques and technology. There are no significant entry or exit barriers to the industry. For example, there will be no sunk costs in a contestable market.

Question 80

incumbent firms

Answer 80

firms already in the market (fear new entrants)