TOPIC 4 Flashcards
What are the characteristics of perfect competition?
- No barriers to entry/exit
- Perfect information
- Lots of buyers/sellers
- Firms are price takers
- No SN profits in long run
- Homogeneous goods
- FoP are perfectly mobile
How is price determined in a perfectly competitive market?
Price is determined by supply and demand
What are the positives of perfect competition?
- allocative efficiency
- productive efficiency
- SR supernormal profits could lead to dynamic efficience
What are the negatives of perfect competition?
- No economies of scale
- unrealistic model
What are the characteristics of a monopoly?
- One buyer/ seller (pure)
- firm is price maker
- SN profit in short and long run
- High barriers to entry/exit
- Price discrimination
What is the definition of monopoly power (in the U.K.)?
A firm with more than 25% of market share
What is dynamic efficiency?
When new technology improves productivity over time
What is X-inefficiency?
When average costs are higher than they should be due to a lack of competition
What are the factors influencing monopoly power?
- Brand loyalty
- sole ownership of a resource
- economies of scale
- number of firms
- high barriers to entry
- sunk costa
- advertising
What is a natural monopoly?
When a market is most efficient when there is a monopolu
What is price discrimination?
When a firm charges different prices to different people for the same good/service
What is 1st degree price discrimination?
Each consumer is charged a different price
What is 2nd degree price discrimination?
Price changes depending on volume purchased
What is 3rd degree price discrimination?
When different groups are charged different prices (eg peak and off-peak)
What are the characteristics of monopolistic competition?
- imperfect competition
- low barriers to entry- exit
- lots of buyers/sellers
- non-homogeneous goods (branding)
- firms are price takers
- imperfect information
- lots of substructures
- non-price competition
What are the characteristics of an oligopoly?
-high barriers to entry/exit
- few firms dominate market
- high interdependence
- product differentiation
- high concentration ratio
What is a cartel?
A group of firms which have agreed to control prices, limit output, or prevent new firms from entering the market
What is price leadership?
One firm changes prices and other forms follow
What is a price war?
Firms are constantly lowering prices to undercut competition
What is nash equilibrium?
The optimum strategy for all players in game theory
What does the kinked demand curve show?
Firms have an asymmetric reaction to one firm lowering prices
What is collusion?
Forms agree to work together to generate higher prices and profit
What are the characteristics of a contestable market?
- Actual and potential competition
- no significant barriers to entry
- new firms have free access to production techniques and technology
- low consumer loyalty
What are the positives if a contestable market?
- likely to be allocatively efficient
- less need for govt. intervention
- lower prices
What are the negatives of contestable markets?
No dynamic efficiency as firms ideas aren’t protected
