Perfect Competition, Oligopolies, Monopolies Flashcards
Market structures
Models of how the firms in a market interact with buyers to sell their output.
Market structures in decreasing order of competitveness
Perfectly competitive markets
Monopolistically competitive markets
Oligopolies
Monopolies
Perfect Competion
Number of firms: many
Type of product: Identical
Ease of entry: High
Example: Growing wheat
Monopolistic competition
Number of firms: Many
Type of product: Differentiated
Ease of entry: High
Example: Clothing stores
Oligopoly
Number of firms: few
Type of product: Identical or differentiated
Ease of entry: Low
Examples: Manufacturing computers
Monopoly
Number of firms: One
Type of product: Unique
Ease of entry: No entry
Example: Providing tap water
Why does a perfect competitor face a horizontal demand curve
Exact substitutes are available in the market.
How does a firm maximize profit in a perfectly competitive market
Producing at the output in which marginal revenue is equal to marginal cost
orThe profit-maximizing level of output is where the difference between total revenue and total cost is greatest
Price takers
Buyers or sellers are unable to affect market price
Summary: Profit, loss & breaking even
P > ATC: profit
P < ATC: loss
P = ATC: breaking even
when should a perfectly competitive firm shut down in the short run
When P < AVC
Long-run competitive equilibrium
The situation in which the entry and exit of firms has resulted in the typical firm breaking even
Why does a monopolistically competitive firm have a downward-sloping demand
The differentiated nature of products mean they are not perfect substitute for one another
How does a monopolistically competitive firm maximize profit
MC =MR
What happens to profits in the long run
when TR > TC = economic profit
new firms enter market
entry of new firms eliminates profits
How barriers to explain the existence of oligopolies
Economies of scale
Ownership of a key input
Government-imposed barriers
Economies of scale
The situation in which a firm’s long-run average cost falls as it increases the quantity of output
The five competitive forces model
1. Competition from existing firms Threat from new entrants Competition from substitute goods or services Bargaining power of buyers Bargaining power of suppliers
Monopoly
A market structure consisting of a firm that is sole seller of a good or service for which there is not a close substitute.
Four main reasons monopolies arise
Government restrictions on entry
Control of a key resource
Network externalities
Natural monopoly
How does a monopoly choose price and output
MC = MR determines quantity for monopolist
At this quantity the demand curve determines price and the ATC curve determines average cost.
Profit = (P-ATC)*Q
How a firm can increase its through price discrimination
Charging different prices to different customers for the same good or service when the price differences are not due to differences in cost.
Government restrictions on entry
Patents, copyrights and trademarks
Public franchise/enterprise: A firm that is the only legal provider of a good or service
Control of key resource
De beers sought to control the supply of diamonds
Network externalities
A situation in which the usefulness of a product increases with the number of consumers who use it.
Natural monopoly
A situation in which the economies of scale are so large that one firm can supply the entire market at a lower average total cost than can two or more firms.
When is price discrimination possible
Firms possess market power
Identifiable groups of consumers have different willingness to pay for the product.
Arbitrage of the product is not possible
