Production, Competitive Markets And Monopoly Flashcards
Relationship between MC and AC
When MC is above AC, AC increases
When MC is below, AC is decreasing
Why is AC U shaped?
Economies of scale for low output
Dis eos for higher output
Why is MC tick shaped
Goes down initially, specialisation and division of labour
Increases with diminishing marginal returns
Perfect competition assumptions (5)
Many buyers sellers
Perfect information
No barriers to entry/exit
Homogenous goods
No agent big enough to influence price. Price takers.
As they are price takers, what is a competitive firm’s MR and AR
MR=AR=P
Marginal revenue is just the revenue from selling one more unit.
Monopoly characteristics
Single supplier
High barriers to entry exit
No close subs
Why is demand curve the AR curve
As we assume a single product is sold for the same price.
A monopolists supply curve
Doesn’t exist as unlike perfect competition, monopolist chooses a single combination price and quantity to supply (price setter)
Policy towards monopolies (4)
Restrict monopoly power-e.g patents
Encourage entry
Regulation
Competition policy to limit exploitation of market power.
What is a competitive firm supply curve
Supply curve follows its MC curve. I.e shift in AR/MR=P will increase price and thus supply more, as they operate where MC=MR
A competitive firm’s short and long run supply curve.
Short run- draw a horizontal line through where MC meets AVC, they wont supply below there in the short run as AVC>P would be
Long run- draw horizontal line through MC=AC
Monopoly vs PC
Monopoly higher prices and lower quantity, also operate at a higher cost as less efficient, however more choice.
