Theory Of The Firm Flashcards
What are high concentration and low concentration markets like and examples?
High concentration - few firms (UK banking sector)
Low concentration - many firms (clothing)
KAPPBEN for perfect competition?
Perfect knowledge Short run only No price setting powers Homogenous product No entry exit barriers Eg. Agriculture Many small firms
Describe perfect competition diagram for short and long run?
AR curve is horizontal because demand is perfectly elastic.
Short run shows SNP
Long run profits are eased away therefore no SNP (produces at min point on AC)
When will firms in perfect competition shut down?
When they can’t cover AVC (MC=AVC)
Efficiency of firms in perfect competition?
In the LONG RUN they are productively and allocatively efficient.
KAPPBEN for monopolistic competition?
Imperfect but can tell when SNP is being made by other firms Short run only Minimal price setting power Similar product Low barriers to entry/exit Eg. Restaurants Many small firms
Which market structures have no long run losses and why?
Perfect and monopolistic because they have no/low barriers to exit.
Efficiency of monopolistic competition?
Neither allocative or productive efficiency
Diagram of firm in monopolistic competition for short and long run?
Short run - normal diagram showing SNP
Long run - normal diagram showing no SNP (AC touches AR above MC=MR but doesn’t cross it)
Define concentration ratio?
The market share controlled by the ‘n’ largest firms.
KAPPBEN for a monopoly?
Imperfect Yes Unique Price maker High Eg. British telecom One firm dominates (plus 25% of market)
Efficiency of monopoly?
Neither allocatively or productively
Dishes for monopoly?
Normal diagram with larg SNP
Advantages of monopoly as a result of SNP? (3)
- finance for investment
- reserves can be kept and saved so in periods of less demand they don’t have to lay off workers
- funds for R+D
Advantages of monopoly as a result of monopoly power? (4)
- cross subsidisation can keep less used products from being eliminated from the market, such as rural bus services
- price discrimination raises TR to allow survival of goods/services
- they benefit from EofS therefore AC are lower
- SNP acts as incentive for rival firms to develop a better product, therefore bypassing barriers to entry
What is cross subsidisation?
When firms take profits from one part of their company and use it to subsidise losses in another part of their company.
Disadvantages of monopoly as a result of SNP? (3)
- less incentive to be efficient
- less incentive to develop new products
- have resources to make barriers to entry high
Disadvantages of monopoly as a results of monopoly power? (5)
- high price for consumers
- can waste resources through cross subsidisation
- may price discriminate
- not productively efficient
- misallocation of resources if price is set above marginal cost
Define price discrimination?
Charging a different price for the same good or service in different markets.
3 conditions for price discrimination?
- high entry barriers and a degree of monopoly power
- at least 2 separate markets with different PEDs.
- markets must be kept separate at a cost lower than the gain in profits. This prevents resale between markets.
Draw diagrams to show 3rd degree price discrimination?
Notes
What is a natural monopoly and why do they exist?
When an industry can only support one firm (eg. Water/oil/gas)
They exist because some industries have very high start up costs and large EofS, and so it is inefficient and very expensive to have more than one firm in the market.
What is a contestable market?
A market with low/no barriers to entry/exit and the threat of competition can change the behaviour of firms significantly.
What is a monopsony?
When there is one sole buyer in a market who therefore can determine the price.
Why can’t firms in a contestable market make short or long run abnormal profits?
Because if the price is too high then other ‘hit and run’ profit seeking firms will join the market, forcing the price down. Even in the short run SNP can’t be made because firms in the market already fear of other firms joining and then not leaving the market after the profit wears away, so they prefer to sell without SNP.
Efficiency of firms in contestable market?
Allocatively and productively efficient
How can supermarkets create a monopsony?
They can collude to create a monopsony market with farmers to guarantee themselves low prices.
Advantages of monopsony market?
Lower consumer prices, can balance out monopoly price setting prices, can create better quality than perfectly competitive market.
