The Firm and Market Structures Flashcards
Perfect competition
Homogenous product, no single producer large enough to influence market prices; earn normal profit
Monopolistic competition
Large number of firm, differentiated on product leading pricing power
Oligopoly
Small number of firms supply market, each careful only to protect from retaliatory strategies of others in market
Pure monopoly
No other good substitutes for a product, single seller
Describe firm’s supply structure under each market structure
a
Describe and determine optimal price and output for firms under each market structure
Firms maximize profits when marginal revenue = marginal cost
Monopolists don’t have supply curves - quantity produced is where MR=MC
Explain factors affecting long-run equilibrium under each market structure
Perfect competition - entrants will increase supply if there is economic profit, so firms operate at zero economic profit (firms just cover rental cost of capital).
Monopolistic competition - risk of entrants will keep economic profits to zero
Oligopoly - long run economic profits possible, but market share of dominant firm generally declines as new entrants trickle into market
Monopoly - economies of scale and threat of regulation may make monopolies more efficient than perfect competition.
Describe pricing strategy under each market structure
Perfect comp - beholden to market demand/supply (price taker)
Monopolistic comp - each firm sets price based on its differentiation
Oligopoly - competitors actions greatly affect pricing
Monopoly - firm sets price subject only to low risk of entry or regulation if price too high
Describe use and limitations of concentration measures in identifying market structure
Concentration ratio is sum of market shares of largest firms, but does not directly quantify market power, tends to be unaffected by mergers of big firms, and do not take account of entry into market
HHI ratio is sum of squared market shares, which solves merger issue
Identify type of market structure within which a firm operates
Look at: Number of firms Their market shares Nature of competition Availability of substitute goods Barriers to entry and exit
In perfect competition, explain relationship between:
Price Marginal revenue Marginal cost Economic profit Elasticity of demand
price = marginal revenue = marginal cost
perfectly elastic demand curve
zero economic profit
In monopolistic competition, explain relationship between:
Price Marginal revenue Marginal cost Economic profit Elasticity of demand
price > marginal revenue = marginal cost
Downward sloping firm demand curve
zero economic profit in long run
In oligopoly, explain relationship between:
Price Marginal revenue Marginal cost Economic profit Elasticity of demand
price > marginal revenue = marginal cost
Downward sloping firm demand curve
Maybe positive economic profit in long run
Tends toward zero economic profit over time
In monopoly, explain relationship between:
Price Marginal revenue Marginal cost Economic profit Elasticity of demand
price > marginal revenue = marginal cost
Downward sloping firm demand curve
Maybe positive economic profit in long run
Profits tend toward zero because of costs of preserving monopoly
Elasticity of demand
= - (% change in quantity) / (% change in price)
> 1 elastic
= 1 unitary elastic
< 1 inelastic
