Theory Of The Firm Flashcards
Characteristics of perfect competition
Number of firms: Many small firms
Type of product: Homogeneous
Type of knowledge: Perfect knowledge about competitors
Barriers to entry/exit: None
Price setting powers: None, price is set by the market
Short run vs Long run in perfect competition.
Short run: supernormal profits can be made
Long run: super normal profits attract new firms: Supply increases represented by an outward shift in the supply curve. This leads to quantity and price falling for the firm and now only normal profits are made. This is known as the LONG RUN EQUILIBRIUM .
Is a firm in Perfect competition either productively efficient or allocatively efficient at any point?
Allocativley and productively efficient in the long run
What is meant by the term “shut down point”?
As long as AVC Are being covered, a firm will continue to operate in the short run because the firm is still contributing to to the sunk fixed costs. If
Characteristics of of monopolistic competition?
Number of firms: Many small firms
Type of product: non homogenous
Knowledge: imperfect knowledge however rival firms know when super normal profits are being made.
Barriers to entry/exit: none
Price setting powers: firms have price setting powers because they produce slightly differentiated goods.
Short run vs long run for monopolistic competition?
Short run: super normal profits
Long run: super normal profits cannot be maintained do to the near perfect knowledge allowing firms to enter the market alongside low barriers to entry.
Normal profit is made. Firms do not make losses as the low barriers to exit mean they can just leave the industry.
Is monopolistic competition allocativley efficient or productive efficient at any point?
NEVER
Characteristics of a oligopoly?
Number of firms: A few large firms Type of product: non homogeneous Knowledge: imperfect knowledge Barriers to entry/exit: high Price setting powers: price setting power
Define collusion
An agreement between two or more firms to limit competition and increase welfare gains for the firms concerned.
Is collusion illegal?
Hell yeah!!
Overt/tact collusion?
Overt- open collusion
Tacit- implicit co-operation where no words are said
How can matrices be used to show collusion?
Collusion occurs when both firms adopt high pricing. However mistrust may develop and a firm may try to earn more profit by setting a higher price. This leads to the collusive agreement being broken.
Characteristics of a monopoly
Monopoly- sole supplier of a good or service. Type of product- unique Knowledge- imperfect knowledge Barriers to entry/exit- high Price setting power- price maker
Short run vs Long run for a monopoly?
As a result of high barriers to entry monopolies can set high prices without fear of other firms entering the market. In this way profits can be maximised in the long run.
What can the lack of competition cause in monopolies?
X-inefficiencies can occur because there is no incentive to maintain an edge over competitors because there are none!
Monopolistic competition long run diagram?
AC curve shifts upwards and is now tangential to the AR curve
Are monopolies either allocativly efficient or productively efficient?
They are neither
What three conditions will price discrimination be successful under?
1)Degree of monopoly power/high barriers to entry 2)Two different markets with different PED 3)Markets can be kept separate at a cost that is lower then the gain in profits(To prevent cheaper resale)
Evaluation to the formation of monopolies?
Natural monopolies: which occur in a industry that has high sunk costs and requires large levels of output to exploit economies of scale. Supernormal profits: help fund R&D and create reserves to overcome short term difficulties.
Economies of scale: may be able to take advantage of economies of scale meaning AC will be lower than a competitive firm.
What is the definition of a contestable markets?
Exist in markets with low barriers to entry/exit and therefore low sunk costs. For example no one firm dominates with high brand recognition, requiring large amounts to be spent on advertising to gain marketshare.
What is a monopsony?
The sole buyer in an industry. Firms could collude together to increase buying power and exploit sellers to get lower prices.
Monopsony evaluation?
If a firm can get cheaper goods they could then possibly pass the cheaper price onto the consumer however firms may sometimes choose to increase their profits instead. Monopsony power may also be beneficial as it may be able to balance out monopoly power.
What are strategies to gain market share and increase profitability?(non price competition)
Pricing strategies- Predatory pricing, limit pricing
Non pricing strategies- Advertising, branding(loyalty cards), packaging, customer service, quality, innovation and mergers.
Why will oligopolies avoid price competition and instead use non price competition?
Price competition will lead to price wars which would offset gains of increased sales.
What are the aims of non price strategies and what do they often mean in the short run?
In the short run there will be a fall in profits. The aim of non-price strategies is to increases demand and reduce the PED by reducing the number of substitutes available.
