theory of firms Flashcards
normal profit
profit needed to keep FOP in current use, in the long run
supernormal profit
excess amount of profit
assumptions of perfect comp
large number of firms
homogeneous products
freedom of entry/exit
price takers, no control of p
small supply per firm
perfect knowledge
short run loss of PC
so many firms in market, supply is high so price is low, leading to making a loss
long run of PC
firms leave the market, supply goes down and thus price goes up, return to normal profit
short run SNP of PC
firms leave supply down, price up, Super normal profit
assumptions of monopoly
1 firm
high barriers
price maker
imperfect knowledge
disadvantage of monopoly
allocative inefficiency
productive inefficiency
x-inefficiency
over priced
low output
low quality
SNP
advantages of monopoly
EOS
research and development
been efficient in the past
reinvest SNP
price descrimination
the practice of charging different prices for same good/service
first degree PD
diff price for every unit consumed
second degree PD
diff price for diff quantities
third degree PD
diff price for diff consumer groups
conditions for Price descrimination
different markets
different elasticities
markets kept separate
no seepage between markets
assumptions of Monopolistic Comp
lots of firms
some control over price(differentiating products)
easy to enter/exit
imperfect knowledge
profit maximisers
short run SNP of MC
compete on non price differences, raise price
short run loss min of MC
lots of firms, price down
long run E of MC
new firms enter, return to normal profit
oligopoly features
stable prices
collusion
high barriers
non-price diffs
brand loyalty source of comp
kinked demand
if a firm increases prove above the kink, other forms will stay at the lower price and make more profit.
if a firm lowers price below the kink, all firms follow and all lose profit
contestable market features
behaviour influenced by threat of new entrants
no barriers
little to no sink costs
price wars
artificial barriers to emtry
