Perfect Competition, Imperfectly Competitive Markets And Monopoly Flashcards
What are the characteristics of a perfectly competitive market?
- Infinite buyers & sellers
- Firms are price takers
- Free entry & exit to the market
- Perfectly symmetric information
- Homogenous goods
- Perfectly mobile factors of production
- Firms are short term profit maximisers
- Firms achieve normal profits in the long run
Examples of perfectly competitive markets?
They don’t actually exist in real world economies because it is impossible to meet all 6 conditions simultaneously.
the closest example is the FOREX market.
Why do perfectly competitive markets only achieve normal profits in the long-run?
Because there are no barriers to entry, when firms are making supernormal profit in the short-run, new firms are incentivised to join the market. This decreases the price, causing normal profits. The opposite occurs if a firm is making subnormal profits?
Are perfectly competitive markets productively efficient?
Yes, firms produce where AC is minimised.
Are perfectly competitive markets allocatively efficient?
Yes, they produce where P = MC
Are perfectly competitive markets dynamically efficient?
May be limited in the long run due to falling supernormal profits.
Are perfectly competitive markets X efficient?
Competition between firms acts as an incentive.
What is X efficiency?
Occurs when a firm eliminates al unnecessary costs.
What is dynamic efficiency?
Occurs when all resources are allocated efficiently over time, rate of innovation is at the optimum level leading to falling LRAC
What is a monopoly?
A pure monopoly is when there is only one firm in the market.
In the UK, when a firm dominates the market with 25%+ of the market share, they have monopoly power.
What are characteristics of a monopolistic market?
- 1 firm dominates the market
- High barriers to entry
- Firms are price makers
- Profit maximisation, supernormal profits in the long-run & short-run
What is monopoly power?
The ability of a monopoly to raise & maintain the market price above market equilibrium
Examples of barriers to entry to monopolistic markets?
- Existing economies of scale, existing firms have a cost advantage, deterring new entrants.
- Price intimidation, firms can set their price below the production costs of new firms so they cannot enter the market profitably
- Sunk costs
-Brand loyalty - Set up costs
Are monopolies productively efficient?
No, firms do not produce where MC = AC
Are monopolies allocatively efficient?
Usually P > C so no.
Are monopolies dynamically efficient?
May be limited due to lack of competition as an incentive.
Are monopolies X efficient?
Limited to to a lack of incentive
Examples of monopolies?
- Natural monopolies like gas & water
- Royal mail (25% share in 2023)
- Google +90%
What is an oligopoly?
A market that is dominated by a small number of firms
What is the concentration ratio?
Measures the combined market share of a leading group of businesses in a clearly defined.
As a rule of thumb an oligopoly exists when the 5-firm concentration ratio exists above 60%
What are the key characteristics on an oligopoly?
- Dominated by a small number of large firms
- Interdependence
- High barriers to entry
- Non-price competition
- Similar goods
What is interdependence?
Each firms pricing and output decisions directly impact the profits of its rivals.
Examples of non-price competition?
Explain the kinked demand curve
Above the market price, there is elastic demand, a small increase in price will lead to a large decrease in demand.
Below the market price, the curve is very inelastic, a decrease in price leads to a small change in demand.
Examples of oligopolistic markets?
- Mobile phone networks
- Supermarkets
- Airlines
Why do oligopolies compete via non price competition?
