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Economics Yr2 Micro > Perfect Competition, Imperfectly Competitive markets and Monopoly > Flashcards

Perfect Competition, Imperfectly Competitive markets and Monopoly Flashcards

1
Q

Name 4 market structures

A

Perfectly Competitive Market

Monopolistc Competition

Oligopoly

Monopoly

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2
Q

Name 4 factors that one can use to determine a market structure

A

Product Differentiation

Limit/predatory pricing

No. of firms in market

Entry/exit barriers

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3
Q

What are entry barriers

A

Obstacles that make it difficult for a new firm to enter a market

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4
Q

What are exit barriers

Give 2 examples

A

Obstacles that make it difficult for an established firm to leave a market

Product Differentiation

Sunk Costs

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5
Q

What are natural barriers

A

Barriers that result from inherent features of the industry

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6
Q

What are sunk costs

A

Costs that have already been incurred and cannot be recovered

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7
Q

What are artificial barriers

A

Barriers erected by the firms themselves

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8
Q

What are limit prices

A

Prices set low enough to make it unprofitable for other firms to enter the market

A firm may use cross subsidization to be able to do this

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9
Q

What is predatory pricing

A

Prices set below average cost with the aim of forcing rival firms out of business

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10
Q

What is product differentiation

A

The marketing of generally similar products with slight differences, or just completely different products by firms in the same market

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11
Q

What is profit maximisation

Why

A

When MR = MC

Above this point, the cost of producing the next product will exceed the revenue receive from it

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12
Q

Name 6 firm objectives apart from profit maximisation

A

Survival

Public sector organisation - P=MC - maximise society welfare

Corporate Social Resposnibility

Sale Maximisation

Satisficing

Revenue Maximisation

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13
Q

What is the Divorce of Ownership from Control

A

The owners and those who manage the firm are different groups with different objectives

This causes the principal agent problem

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14
Q

Explain the Principal-Agent Problem and what the different objective might be

A
  • Problem caused by the divorcee of ownership from control
  • Agents are the managers
    • They have the monopoly of technical knowledge on how to run the firm
    • May want to maximise their career
  • Principles are the shareholders
    • May just want profit maximsation
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15
Q

What are downsides of the existence of the divorce of ownership from control

A
  • May affect agents incentives
    • They bear the cost of fulfilling the task, but don’t receive the full benefit, the principal does
  • Agents may take on excessive risks
    • If risk goes well, they will benefit a bit, if risk fails, the principal will be the one who loses money
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16
Q

How might the agent succeed in not acting in the principals best interest

A
  • Cost to principal of sacking/punishing agent
  • Information Asymmetry
    • Principal has little way of knowing if bad performance is down to poor management or external factors
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17
Q

How do firms try to solve the principal - agent problem

A

Executive stock options

Giving managers company shares - company related pay

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18
Q

Explain the principle of satisficing

A

A firm has different stakeholders that want different things

Managers try to make as many stakeholders happy as possible by achieving a satisfactory outcome instead of the best one

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19
Q

Name 5 assumptions of a perfectly competitive market

A

All firms are price takers

There are many buyers and sellers

Products are homogenous

No barriers to entry/exit

All have perfect information

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20
Q

Diagram for a perfectly competitive market in the short run

A

MC cuts ATC at the lowest point

The firm doesn’t produce at the lowest point on the ATC

Firm produces where MR=MC

Supernormal profit is from ATC to AR

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21
Q

What does the diagram for a PCM in the SR show

A

There is allocative efficiency, as P=MC

There is no productive efficiency, firm doesn’t produce at the bottom of the ATC

There is supernormal profit

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22
Q

Diagram for a PCM in the Long Run, explain the diagram

A

D, MC, ATC all meet at the point where the firm produces

In the long run, the supernormal profit is an incentive for new firms to enter the market, increasing market supply, lowering D=AR=MR=P

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23
Q

What does the diagram for a PCM in the LR show

A

There is allocative efficiency, as P=MC

There is productive efficiency, at the bottom of the ATC

There is static efficiency

There is normal profit

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24
Q

What is a Pure Monopoly

A

One firm in a market

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25
Q

Name the 5 assumptions of a pure monopoly

A

1 firm in the industry

No close substitutes

Barriers to entry

Firm earns a supernormal profit

Firm is a price maker

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26
Q

What is monopoly power in the UK

A

When a firm has 25%+ of the market share

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27
Q

Monopoly diagram in the short run

What is the diagram for a monopoly in the long run

A

The same thing

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28
Q

How does a Pure Monopoly change in the short run vs long run

Why

A

It doesn’t

There are barriers to entry

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29
Q

Name and explain 2 advantages to a monopoly

A
  • Economies of scale
    • Enough space for it, can pass on lower cost to consumers, or they can be more efficient
  • Dynamic Efficiency
    • Supernormal profit made can be used for R&D - innovation
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30
Q

What is a counter argument to the advantages of a monopoly

A

It will reduce incentive for innovation

Firm is protected from competitive pressures, may decide they want to profit satisfice and not maximise

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31
Q

Name 5 disadvantages of a monopoly

A

Market Failure

Possible diseconomies of scale

Static inefficiency

Supernormal profit

May take advantage and pay lower prices to suppliers

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32
Q

How is market failure a disadvantage of monopoly

Use a diagram

A

Monopoly is a quantity setter, will produce where MR=MC, restricting output.

This represents a misallocation of resources and a loss of consumer surplus due to the deadweight loss

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33
Q

Why/How do governments tolerate monopolies

A

It’s difficult to break them up

They can be dynamically efficient

Their higher profits will mean more corporation tax (given that they don’t evade tax like many large corporations such as Starbucks/Amazon do)

Governments use regulation to keep them in check. Eg. OFWAT regulate the prices of water companies

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34
Q

Define Allocative efficiency

A

When it’s impossible to improve overall economic welfare by reallocating resources between industries/markets

When P=MC

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35
Q

What is a monopolistically competitive market

Give 2 examples

A

A market that resembles both a monopoly and a PCM

Restaurants - compete on quality of food

TV programmes - Diversity of TV shows

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36
Q

What are 5 assumptions of monopolistic competition

A

Widespread, but not perfect knowledge

Firms are price makers and profit maximisers

Low barriers to entry/exit

Large no. of independent firms

Differentiated products

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37
Q

How is monopolistic competition similar to a PCM

A
  • There are many firms
  • No barriers to entry in the long run
    • New firms enter in the long run, reducing supernormal profits to normal
38
Q

How is monopolistic competition similar to a monopoly

A

Firms are price makers as there is a degree of product differentiation

So each firm has monopoly power, if a firm raises its price, it won’t lose all its customers - demand isn’t perfectly elastic

39
Q

Monopolistic competition diagram in the short run

A

MR and AR should be more elastic than in a monopoly

40
Q

What does the diagram for monopolistic competition in the short run show

A

There is no productive efficiency

No allocative efficiency

There is supernormal profit

41
Q

Diagram for monopolistic competition in the long run

A

The point are ATC=AR, is also where MR=MC and is where the firm produces

The lowest point on the ATC should be after it meets AR

42
Q

What does the diagram show about monopolistic competition in the long run

A

No productive efficiency

No allocative efficiency

Normal profits

43
Q

What is an oligopoly

A

A market dominated by a few producers, each of which have control over the market

44
Q

Name 4 assumptions/characteristics of an oligopoly

A

Product Branding

Entry Barriers

Interdependent decision making

Non Price Competition

45
Q

Describe the market conduct of firms in an oligopoly

A

Firm affects its rivals through its price and output decisions

Its own profit can also be affected by how rivals behave and react to the firm’s decisions

46
Q

How is there uncertainty in some oligopolies, how do firms get rid of this

A

In competitive oligopolies, there is uncertainty as firms don’t know how firms will react to changes in price, output or marketing

To avoid it, they collude, making the oligopoly more uncompetitive

47
Q

What is a competitive oligoply

A

Exists when the rival firms are interdependent as they must take into account other’s reactions when forming strategy

But independent in that they don’t cooperate/collude in these strategies

48
Q

What is a cartel

Give an example of one

A

A collusive agreement by firm to fix prices and sometimes restrict output, deter entry of new firms

OPEC

49
Q

How might a firm benefit from joining a cartel, how does this become a disadvantage to society

A

If the firm is the most productively inefficient

If they join all firms can decide to charge a price to keep the firm in business

So inefficient firm can survive, and the efficient firms can enjoy supernormal profit

So this displays the disadvantages of a monopoly - (high prices, restriction of choice)

50
Q

What is Overt Collusion

A

When a formal agreement is made between firms

Illegal in many countries

51
Q

What is Tacit Collusion

A

Informal Collusion, more implied

52
Q

What is cooperation

A

Firms working together to develop a product, how they are managed or organsied

Usually with good intentions, so are allowed by governments

53
Q

The Kinked demand curve diagram

What is the diagram used to explain

A

How price rigidity is caused by a competitive oligopolist trying to factor in the possible reactions of rival firms to its price/output decisions

54
Q

Explain how Kinked Demand Curve shows price rigidity in a competitive oligopoly

A
  • Let the point where the kink is be P1, Q1
  • If a firm increases its price, demand is very elastic as no other firms will follow suit, so consumers will move to other firms.
    • If a firm lowers its price, they expect other firms will do the same to avoid losing customers. If all firms decrease prices, a small amount of customers will move so demand will be inelastic. So it would only lower all the firms profit, in an extreme case this will spark a price war.
55
Q

Name 3 criticisms of the kinked demand curve theory

A
  • Incomplete theory
    • Doesn’t expalin why a firm produces at Q1 in the first place
  • Model assumes firms will react in a certain way
    • In the real world, evidence has clearly shown this isn’t necessarily how firms react
  • Ignores price competition
56
Q

What is price leadership, what type of collusion is this

A

The setting of prices in a market, usually by dominant firms, which is then followed by other firms in the same market

Tacit collusion

57
Q

What is a price agreement

A

An agreement between a firm, similar firms, suppliers or customers regarding the pricing of a good or service

Cartels do it when it is between similar firms

58
Q

What is a price war

What market structures can it occur in

A

When rival firms continuously lower prices to undercut each other.

Aim to increase market share or even force rival firms out of business

Can occur in monopolistic competition or in oligopoly

59
Q

What is price discrimination

A

Charging different prices to different customers for the same product or service, with the prices based on different willingness to pay

60
Q

What are the 3 conditions that must be met for a firm to use price discrimination

A

Different elasticities of demand

Firm must be a price setter

No arbitrage (Resale)

61
Q

Name 3 disadvantages to price discrimination

A

Not allocatively efficient

Administration cost

Loss of consumer surplus

62
Q

Name 3 advantages of price discrimination

A

Higher revenue, can be used for dynamic efficiency

THose with higher incomes are likely to pay more, can be used for cross subsidisation

63
Q

What is a contestable market

A

A market in which the potential exists for new firms to enter the market, so incumbent firms act more competitively.

So it can deliver the theoretical benefits of perfect competition but without the need for many firms

So a firm in a monopoly can act efficiently

64
Q

Name 4 assumptions of a perfectly contestable market

A

Threat of hit and run entry

No entry/exit barriers

No sunk costs

Perfect information, access to the best available tech

65
Q

What is 1st degree price discrimination

Give an example of it

A

When each customer is charged the maximum they are willing/able to spend

There is a complete transfer of consumer surplus to the producer.

Car dealerships

66
Q

What is second degree price discrimination

A

Charging different prices based on the quantity of a purchase.

More revenue as some consumer surplus is transferred. Rewards buying more

67
Q

What is 3rd degree price discrimination

A

Charging different prices based on groups with different Elasticities of demand.

Consumers with more inelastic demand charged higher, so receive less consumer surplus

68
Q

Define Consumer Surplus

A

A measure of the economic welfare enjoyed by consumers

The surplus utility received over and above the price paid for a good

69
Q

Define Producer Surplus

A

A measure of the economic welfare enjoyed by firms or producers

The difference between the price a firm succeeds in charging and the minimum price it would be prepared to accept

70
Q

Diagram for 2nd degree price discrimination

A
71
Q

Diagram for 3rd degree price discrimination

A
72
Q

How does a contestable market deliver the theoretical benefits of perfect competition but without the need for many firms

A

As they are about the ease/difficulty with which new firms can enter the market

The threat of entry of potential competition is enough to ensure the efficient behaviour of incumbent firms

73
Q

What kind of monopoly policy has the UK started to use in light of contestable market theory

A

Deregulatory policies

To minimise barriers to entry/exit and keep reasonable contestability

74
Q

What is hit and run competition

A

When a firm temporarily enters a market to get supernormal profit, then leaves when they have been competed away due to no barriers to exit

75
Q

Why don’t incumbent firms want hit and run competition

How do they usually combat this

A

As they come into a market and get rid of all firms supernormal profits, then leave

By reducing selling price to a price where only normal profit is made

76
Q

How might a firm reduce market contestability

Explain each

A
  • Predatory behaviour
    • Increasing barriers to entry/exit
  • Raising rivals’ costs
    • Will make it difficult for new rivals to appear
  • Reducing Rival’s revenues
    • Make it difficult for new rivals to appear
  • Cross - subsidisation
    • Be able to charge a price so low, new firms cannot compete
77
Q

How might a firm raise rival’s costs

A

Vertical integration

Act as a component supplier to other firms, have control over the supply chain

78
Q

Name 3 problems with Contestable Market Theory

A

No perfectly contestable markets actually exist

The threat of entry of new suppliers may not be enough to affect behaviour

Doesn’t include how structural changes in costs in the industry can affect degree of contestablity

79
Q

What are restrictive trade practices?

Name 4

A

Chargng Discriminatory prices

Resale price maintenance

Refusal to supply certain outlets/markets

Full line forcing

80
Q

What is resale price maintenance

Give an example of one

A

When manufactuers fix prices that retailers must sell at - prevents price competition

E.g Drink bottles that have the price printed on them

81
Q

What is full line forcing

A

When a supplier forces a firm that wants to sell 1 of its products to stock the whole product range.

Leaves not as much space for other manufactuers

82
Q

Give an example of refusal to supply certain outlets/markets

A

How some high end suppliers will only supply Harrods and not Lidl

83
Q

Diagram comparing Monopoly and Perfect competition

A

But MC line is straight

No need to show consumer surplus

84
Q

Defien Deadweight Loss

A

The reduction in consumer and producer surplus when output is reduced to less than its optimal level

85
Q

Diagram for Dynamic Efficiency

A
86
Q

Name 4 reasons why a firm would want to maximise profit

A
  • Reinvestment
  • Dividends for shareholders
  • Lower costs and lower prices for consumers
  • As the reward for entrepeneurship
87
Q

Explain 4 reasons why a firm may not want to maximise profit

A
  • Greater scrutiny
    • Authorities may be more likely to investigate them, force them to change in an undesirable way
  • No knowledge of where MC=MR
  • Other objectives more appropriate
  • May harm key stakeholders
    • Making it more appropriate to focus on other objectives
88
Q

Name 6 key stake holders for a business, whether they are likely to be happy with profit maximisation and how a firm might suffer from not keeping them happy.

A
  • Managers
    • Happy - Higher bonuses
  • Shareholders
    • Happy - Higher dividends
  • Consumers
    • Unhappy - Higher prices
    • Hurt reputation of firm
  • Workers
    • Unhappy
    • May strike
  • Government
    • Unhappy
    • Investigate - anti business interest outcomes
  • Environmental groups
    • Unhappy
    • Ruin reputation - on social media
89
Q

Define Revenue Maximisation

Name 3 reasons why a firm may want to do it

A
  • When MR is 0
  • Economies of scale - Higher output, lower cost than MR=MC
  • Predatory Pricing
    • Costs are lower here
  • Principal - Agent Problem
    • May want to get higher revenue to get more perks - company cars/nice hotels
90
Q

Define Sales maximisation

A
  • When AC=AR, break even output
  • Economies of scale
  • This price is the limit price - takes away the incentive for firms to want to come in
  • Principal agent problem
    • May use this as leverage and get perks
  • Flood the market
    • More consumers know about your product, developing loyalty
91
Q

How may one show Profit, Revenue and Sales Maximisation on a diagram

A

Use monopoly diagram

Profit : MC=MR

Sales : AC=AR

Revenue: MR=0

Satisficing : Any in the quantity range between Sales and Profit max

Economics Yr2 Micro (7 decks)

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