Product differentiation, monopolistic competition and oligopoly Flashcards
what are characteristics of perfect competition?
- high level of competition, many firms and producers
- Price takers (must take price set by the market; no control over price due to high level of competition)
- homogenous products, perfect substitutes for each other
- easy for competitors to enter and leave (low barriers of entry)
firm with perfect competition looks like
perfectly elastic
no control over price
if they raise their price to 11, then consumers will go to their competitors
no reason to sell below 10 as they could be selling a higher price –> make more profit
in the perfect competition price elasticity diagram, the perfectly elastic line can also be
marginal revenue: selling an additional unit will be an increase in 10 of revenue
D = AR (average revenue) = MR (marginal revenue) = P
how many units should a firm in perfect competition produce?
according to profit maximisation rule, should qty where MR= MC, and always produce qty where MR>MC
at the point where MR (additional revenue of producing that unit) = MC (additional cost from producing that unit) (stop producing) (this is the profit maximising qty)
if you produce where MC > MR, less profit
what is total revenue?
what is the total cost of producing at 10 units?
what is the profit the firm is making from producing 10units?
firm making a loss in perfect competition, selling at $10
firm in perfect competition breaking even, selling at $10
firm in perfect competition, selling at $10 and making a profit
what is the profit maximising qty?
what is the total revenue at that qty?
how much is the profit?
where MR = $30
- 5 units as MR> MC
- total revenue = 30 x 5 = 150
- profit = total revenue - total cost = 150-80 = 70
what happens to firms in perfect competition in the long run?
due to low barriers of entry, more competitiors will enter, causing the supply curve to shift to the right in the market supply and demand graph –> market price falls
therefore, firms in perfect competition will have to reduce their price, as they are price takers. Firm will go into a long-run equillibrium at MR= MC which means no profit will be made
what is monopolistic competition?
- Some control over price
- Relative number of competitors
- differentiated products, not identical
- relatively low barriers to entry
what is oligopoly competition?
- high level of control over price
- few firms
- can be identical or different
- high barriers of entry
what is a monopoly?
- price setters (total control over price)
- One firm
- unique products
- very high barriers of entry
why is the demand/MR/AR/P perfectly elastic in perfect compettition?
because firms in perfect competition are price takers. The firm can sell as many products as they want at the price set by the market
a) at qty 0, total costs = 20 therefore, fixed cost must be 20
b) 27-20 = 7
c) 4
d) number of firms will increase in the long run, as profit attracts new firms. Profit= total cost (TC) - total revenue (TR)
e) short run, firms might enter or leave. Long run, no change.
firms in an oligopoly may
lower price
or maintain price
what is ACDC’s dominant strategy
Should maintain
as 150>110
120>100
what is clifford’s dominant strategy?
no dominant strategy
if they maintain receive, 140
lower receive 130
maintain receive 100
lower receive 150
what happens if clifford does not have a dominant strategy?
Look at competitor’s strategy
As ACDC plans to maintain,
Clifford should also maintain since 140>130, and this will give them the most profit. This will give them the Nash equilibrium
find A and B’s dominant strategy
A’s dominant strategy is to run advertisement as 100>75 and 90>60
B does not have a dominant strategy as 85>80 BUT 60
Find dominant strategies (if there is one)
Firm X should lower price as 40
Firm Y should lower price as 30
describe game theory in terms of prisoners dilemma
2 people arrested, charged of a crime and put in 2 different cells
The prisoners can either deny or confess to the crime. There are 4 possible outcomes that can occur
a monopolistic competing firm in the short-run
they are making profit in the short-run
in monopolistic competition, in the long run
More competitors enter the industry (due to low barriers of entry) and as they see industry is profitable–> more subsitutes —> shifts demand curve to the left –> zero economic profit in the long run
Here, ATC=D where MR=MC (DON’T FORGET)!!
TR=TC - breakeven
what may result to deadweight loss?
- monopoly
- monopolistic competition
- excise tax
- price ceiling
where is consumer surplus when a price ceiling is imposed?
How does the Long-Run Monopolistically Competitive Equilibrium show excess capacity?
Each firm operates with some excess capacity (produces below the level that gives the minimum average total cost) in the sense that it could increase output and reduce ATC
why do monopolistically competitive firms choose not to expand production and lower price, where ATC can be minimised?
because they have some market power to keep their prices a little higher and their output a little lower than that.
what is the payoff matrix?
it is used to illustrate game theory
Clyde is better off
confessing regardless of whether Bonnie confesses or remains silent.
as 5
1
what is the outcome?
is this the best outcome?
Bonnie and clyde will both confess, resulting to a non-cooperative outcome
no, as this would lead to 5 years in jail each
If they agreed in advance to both remain silent, they would have 3 years in jail each
