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Economics MICRO > Perfect & Imperfectly Competitive Markets & Monopolies > Flashcards

Perfect & Imperfectly Competitive Markets & Monopolies Flashcards

1
Q

what are some characteristic’s of markets ?

A
  • number of firms in a market
  • the degree of product differentiation
  • barrier to entry
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2
Q

what are some examples of barriers to entry ?

A

pricing strategies
economies of scale
reputation
brand loyalty
control over technology
reputation

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3
Q

what are the 3 main objectives of firms ?

A

profit maximization
survival
growth

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4
Q

where does profit maximization occur ?

A

MC=MR

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5
Q

what are the positive consequences of profit maximization ?

A
  • higher wages for employees
  • larger dividends for shareholders
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6
Q

what can profit maximization lead to ?

A

retained profits, which is a cheap source of finance

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7
Q

which form of business is likely to profit maximize in the short run and why ?

A

PLCs, to keep shareholders happy

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8
Q

why do some businesses choose to have survival as their main objective ?

A

because they are new firms entering the market

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9
Q

why do some businesses choose to have growth as their main objective ?

A

their aiming to increase the size of their firm

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10
Q

how do business tend to grow ?

A

economies of scale

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11
Q

why is using economies of scale a good way to grow your business ?

A

lowers the firms AC, allowing them to be more profitable

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12
Q

what are the characteristic’s of a perfectly competitive market ?

A

. many buyers and sellers
. sellers are price takers
. free entry and exit from market
. perfect knowledge
. homogenous goods
. firms are short run profit maximisers

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13
Q

in a perfectly competitive market how is price determined ?

A

the interaction of demand supply

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14
Q

how is the market share distributed in a perfectly competitive market ?

A

each firm has a very small market share

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15
Q

if a firm has a small market share, what does that mean ?

A

their market power is very small

profits are reduced

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16
Q

why does the barrier of entry reduce if firms in that market are making higher profits ?

A

because the market seems profitable and therefore firms will want to enter that market

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17
Q

what will happen if increasingly firms are entering the market ?

A

supply will increase, reducing the average price, and existing firms profits will be competed away

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18
Q

what is a pure monopoly ?

A

a sole seller in a market

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19
Q

what are some factors of monopoly power ?

A
  • economies of scale
  • barrier to entry
  • owning a resource
  • brand loyalty
  • setup costs
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20
Q

drawback’s of monopoly power ?

A
  • high prices will lead to misallocation of resources
  • monopolies could exploit the consumers by charging higher prices
  • this will result in underconsumption, and therefore consumer wants and needs are not met
  • this loss of allocative efficiency is a form of market failure
  • production costs are high because monopolies have no incentive to become more efficient, due to a lack of competition
  • loss of consumer surplus, and a gain in producer surplus
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21
Q

benefits of a monopoly ?

A

can use economies of scale to lower production costs

huge profits to be invested in research and development to increase dynamic efficiency (improved technology and automation)

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22
Q

what do firms compete on other than just price ? (non-price competitors)

A
  • improving products
  • reducing costs
  • quality of service
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23
Q

which market structures compete imperfectly ?

A

monopolistic

oligopoly

monopoly

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24
Q

what is monopolistic competition ?

A

a market structure where many firms offering a similar product but with some product differentiation

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25
Q

what is a oligopoly ?

A

a market structure in which few firms dominate the industry

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26
Q

what is a monopoly ?

A

a market structure where there is a single supplier of a particular product, and has 100% market share

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27
Q

how is market failure caused ?

A

through the abuse of market power

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28
Q

what are 4 signs of market failure ?

A

-The ability of suppliers to have control of prices

-The ability of suppliers to restrict output in a market so as to raise prices

-A lack of allocative efficiency

-A lack of productive efficiency

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29
Q

how do governments regulate markets and intervene to prevent or reduce the abuse of market power ?

A

anti-monopoly laws

competition policy

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30
Q

what is market power ?

A

refers to the ability of a firm to influence and control the conditions in a specific market,

allowing them to have a significant impact on:
-price
-output

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31
Q

how can market power be measured ?

A

market share

concentration ratio

barriers to entry

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32
Q

The closer a firm is to being a monopoly … ?

A

the less competition

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33
Q

The closer a firm is to being a perfectly competitive … ?

A

the more competition

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34
Q

from the cost curve diagram of a monopoly how can we tell that this firm has market power ?

A

the MR and AR curves are downward sloping

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35
Q

how do you determine the level of profit a firm is making from its cost curve ?

A

To determine the level of profit:

1)> identify where MC = MR (profit maximisation point) and then extend the dotted line upwards to the point where it hits the AR curve - this is your selling price

2)> Where this line crosses the average cost curve (AC) represents the cost per unit at this level of output

3)> The profit is the difference between the selling price and the average cost

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36
Q

what are some advantages of pursuing profit maximisation ?

A
  • financial stability and growth (by accumulating capital it gives the firms the opportunity to reinvest)
  • shareholder value creation (enhance shareholder value, attract new investors and maintain their competitiveness)
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37
Q

what are some disadvantages of pursuing profit maximisation ?

A
  • ethical and social concerns (focusing on profit maximisation can result in actions that disregard the well-being of employees, communities, and the environment)
  • risk of neglecting non-financial metrics (employee satisfaction, customer loyalty, product quality etc.)
  • Extracting the highest level of short term profits will often detract from future value creation through research or innovation
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38
Q

why can you only profit maximise in the short run, and not in both the short and long run ? , and why does PM in the short run eat away your profits in the long run ?

A

if your profit maximising in the short run, your not using research or innovation to attempt to increase profits in the future, so this will often detract from future value creation.

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39
Q

what is profit satisficing ?

A

where firms aim to make only a satisfactory level of profit, and not seek to maximise profits

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40
Q

what is divorce ownership of control ?

A

occurs when there is a spilt between the ownership of a firm and those who run the business on a day-to-day basis

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41
Q

what are the characters of perfect competition ?

A
  • many buyers and sellers
  • no barriers to entry
  • buyers and sellers have perfect knowledge of prices
  • homogeneous products
  • firms are price takers
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42
Q

why are firms in a perfectly competitive market price takers ?

A

Firms in perfect competition have low market power, low market share

The firm does not have any market power so it is unable to influence the price and quantity
The firm is a price taker due to the large number of sellers
The firm’s selling price is the same as the market price

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43
Q

are firms in a perfectly competitive market able to make a supernormal profit in the short run ?

A

yes

44
Q

why are supernormal profits for firms in a perfectly competitive market not possible in the long run ?

A

If firms in perfect competition make abnormal profit in the short-run, new firms are attracted to the industry
They are incentivised by the opportunity to make abnormal profit
There are no barriers to entry
It is easy to join the industry
The supply increases, and the industry price falls
The firms are now making a normal profit

45
Q

what can cause firms in a perfectly competitive market to make a loss in the short run ?

A

periods of intense competition can cause prices to fall below the average costs

46
Q

why are losses eliminated in the long run for firms operating in a perfectly competitive market ?

A

If firms in perfect competition make losses in the short-run, some will shut down
supply decreases, causing the industry price to increase

47
Q

what is allocative efficiency ?

A

where resources are allocated in such a way that consumers & producers get the maximum possible benefit

48
Q

what is productive efficiency ?

A

where average costs are minimised

49
Q

what is a monopolistic market structure ?

A

A monopolistic market structure is one in which there are many firms offering a similar product but with some product differentiation

e.g. nail salon

50
Q

what are the characteristics of monopolistic competition ?

A
  • slightly differentiated products
  • good efficiency due to competition
  • supernormal profit in the short run, normal profit in the long run
  • in between price taker/maker
  • low barriers to entry
  • large number of small firms
51
Q

what are some non-price competition strategies in monopolistic markets ?

A

location
quality & customer focus
shop environment
owner personality & store image
word of mouth advertising
local marketing initiatives

52
Q

what is an oligopoly ?

A

a market structure, in which a few large firms dominate the industry (each having significant market power)

53
Q

what are the 4 main characteristics of an oligopoly ?

A
  • high barriers to entry and exit (high start up costs, lots of money lost if leave)

high concentration ratio

firms are highly interdependent on each other

high product differentiation

54
Q

what is the concentration ratio ?

A

the percentage of the total market share a specific number of firms have

55
Q

what is the most common way firms in a oligopoly compete ?

A

non-price competitors (product differentiation)

56
Q

what are the reasons why firms in an oligopoly market engage in non-price competition ?

A
  • to limit price wars (firms undercutting each other)
  • to limit price fixing
57
Q

what are the advantages of oligopolys ?

A
  • consumers may benefit from lower prices due to competition and economies of scale

*firms generate super normal profits due to lower costs, which can be reinvested into research and envelopment

*competition incentivises firms to improve he quality of their products

58
Q

what are the disadvantages of oligopolys ?

A
  • High barriers to entry restrict the number of firms entering the market (due to high start up costs )

-High levels of spending on branding and advertising can increase production costs

59
Q

what is a monopoly ?

A

a market structure in which there is a single seller

no substitute products

60
Q

why can monopoly’s make a supernormal profit in the short run and the long run ?

A

because competitors are unable to enter the industry

61
Q

is a monopoly a price maker or taker ?

A

price maker

62
Q

what are the advantages of a monopoly to the firm ?

A

supernormal profits (reinvestment)

global competitiveness

Economies of scale (can increase, thereby lowering the average cost)

Producer surplus increases

63
Q

what the disadvantages of a monopoly to the firm ?

A

lack of incentive to be efficient (no competitors)

64
Q

advantage of a monopoly to the employees ?

A

Supernormal profits often result in higher wages

65
Q

disadvantage of a monopoly to the employees ?

A

Having only one supplier in the industry limits the opportunity to change employers

66
Q

advantage of a monopoly to the consumers ?

A

Product innovation due to the firm’s supernormal profits may result in a better-quality product

Prices may fall If firms pass on their cost savings (due to economies of scale) in the form of lower product prices

67
Q

disadvantage of a monopoly to the consumers ?

A

A lack of competition is likely to result in higher prices as no substitute goods are available

May experience worse customer service as the incentive to improve it is limited

Consumer surplus decreases

68
Q

when does price discrimination occur ?

A

when a firm charges a different price for the same good/service in order to maximize its revenue

69
Q

what is third degree price discrimination ?

A

occurs when a firm charges different prices to different consumers for the same good/service.

70
Q

what are the advantages of price discrimination to firms ?

A
  • The total revenue of producers increases leading to higher profits
  • Firms increase their producer surplus at the expense of a decrease in consumer surplus
71
Q

what are the disadvantages of price discrimination to firms ?

A
  • Many consumers will lose out as they pay higher prices
72
Q

what are the benefits of competition ?

A

price reductions
&
improved quality

73
Q

what are the short run benefits of competition ?

A

lower prices (firms lower prices to gain market share)

more choice (more sellers)

customer satisfaction (firms compete using non-price strategies)

74
Q

what are long run benefits of competition ?

A

sustained lower prices (only the most efficient firms will survive in the long term)

technology improvements (long term competition increases the pace of innovation)

long term quality (abnormal profits can be invested into R&D)

75
Q

what are 5 common non-price strategies ?

A

After-sales service

Packaging

CSR (Firms adapt to social and environmental concerns to show their ethical commitment

Delivery policies

Improved quality

76
Q

what is creative destruction ?

A

the process of innovation and technological change leads to the replacement of old technologies

77
Q

what is a contestable market ?

A

when there is freedom of entry into a market and where costs of exit are low

78
Q

define allocative efficiency ?

A

at this point resources are allocated in such a way that consumers and producers get the maximum possible benefit.

occurs where (MC=AR)

No one can be made better off without making someone else worse off

79
Q

define productive efficiency ?

A

At this point, average costs are minimized

(MC=AC)

80
Q

define dynamic efficiency ?

A

long-term efficiency and is a result of innovation as a firm reinvests its profits

It results in improvements to manufacturing methods

e.g. technological advancements

81
Q

what is the consumer surplus ?

A

the difference between the amount the consumer is willing to pay for a product and the price they have actually paid.

82
Q

what is producer surplus ?

A

the difference between the amount the producer is willing to sell a product for and the price they actually do

83
Q

is consumer surplus below or above the ME price (where demand=supply) ?

A

above, because the higher the price the greater welfare loss for the consumer (Less utility)

84
Q

is below surplus below or above the ME price (where demand=supply) ?

A

below, because the lower the price the greater welfare loss for the producer (less profit)

85
Q

when the market is at equilibrium ?

A

producer and consumer surplus are maximised

86
Q

consumer surplus + producer surplus =

A

societal surplus

87
Q

in a monopoly 1………… surplus is greater than 2…………. surplus.

A

1) producer
2) consumer

88
Q

why is producer surplus greater than consumer surplus in a monopoly ?

A

Due to the lack of competition, monopolies tend to have higher prices and lower output

89
Q

because monopoly’s profit maximise, what also occurs on the diagram ?

A

a deadweight loss (rest of shaded triangle after PM point)

this indicates the loss to society of a lack of efficiency in the allocation of resources

90
Q

what is free trade ?

A

the movement of goods and services across borders without barriers to trade

91
Q

what are the economic benefits of free trade ?

A

flow of new idea

economic development

economic growth

increased efficiency

access to resources

international cooperation

greater choice

lower prices

92
Q

what are the main characteristics of a market ?

A
  • number of buyers
  • number of sellers
  • size of firms
  • type of product
  • types of barriers to entry or exit
  • degree of competition
93
Q

what are some examples of imperfectly competitive markets ?

A

monopolistic competition, oligopolys, monpolies

94
Q

how are market failures caused ?

A

through the abuse of market of power

95
Q

what are some signs of market power abuse ?

A
  • ability of suppliers to control prices
  • ability of suppliers to restrict output
  • lack of allocative efficiency
  • lack of productive efficiency
96
Q

how do governments relate to market power ?

A

governments often regulate markets and intervene to prevent or reduce the abuse of market power through:

.anti-monopoly laws
.competition policy

97
Q

define market power

A

the ability of firms to influence and control the conditions in a specific market, allowing them to have significant impact on price and output

98
Q

what are the main objectives of firms ?

A

Profit maximisation
Growth
Survival
Social-welfare
Satisficing

99
Q

what are advantages of profit maximisation ?

A

+ financial stability & growth (firms can accumulate capital to re-invest)
+ shareholder value creation (greater investment)

100
Q

when does divorce of ownership occur ?

A

when there is a clear split between the ownership of the firm and those who run it on a day-to-day basis.

101
Q

where does divorce of ownership occur ?

A

large firms

102
Q

why does divorce of ownership occur ?

A

because firms owners will appoint managers to make decisions and repeat their interests. Managers may have different goals to the owners, leading to conflict of interest.

103
Q

what are two example of divorce of ownership in different types of business forms ?

A

. PLC
. Family Businesses

104
Q

how does divorce of ownership occur in PLC’s ?

A

a board of directors or executives are responsible for decision making
a shareholder owns a part of the business, but lacks influence over decision making
conflicts of interest may arise if the board of directors prioritise other objectives other than profit maximisation

105
Q

how does divorce of ownership occur in Family Businesses ?

A

not all family members are involved in daily management of the business
control rests with a small group of family member usually
conflicts of interest may arise if some family members aim to pursue objectives such as long-term stability instead of profit maximisation

Economics MICRO (8 decks)

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