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ECON > Week 4 > Flashcards

Week 4 Flashcards

1
Q

what is a change in demand?

A

the term used for a shift in the demand curve. it occurs when a determinant of demand other than price changes

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2
Q

what is the relationship between supply and price? what happens?

A

when the price of a good rises, the quantity supplies will also rise
1. as firms supply more, they’re likely to find that beyond a level of output and so costs rise
2. beyond a certain level of output, costs are likely to rise rapidly, as workers have to be paid overtime etc
3. the higher the price of the good, the more profitable it becomes to produce
4. given time, if the price of a good remains high, new producers will be encouraged to set up its productions. total market supply then rises
1-3 affect supply in the short run
and the fourth affects supply in the long run

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3
Q

what is change in quantity demanded?

A

the term used for a movement along the demand curve to a new point, it occurs when theres a change in price

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4
Q

what is supply schedule?

A

a table showing the different quantities of a goof that produces are willing and able to supply at various prices over a given time period. it can be for an individual producer or a group of producers or a all producers

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5
Q

what is a supply curve?

A

a graph showing the relationship between the price of a good and the quantity of the good supplied over a given time period

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6
Q

what are determinants of supply?

A
  • the costs of production: the higher the costs are, the less profit will be made at any price
  • profitability of alternative products (substitutes in supply):
  • profitability of goods in joint supply
  • nature, ‘random shocks’ and other unpredictable events
  • aims of producers
  • expectations of future price changes
  • the number of suppliers
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7
Q

what causes a change in the cost of production?

A
  • change in input prices
  • change in technology
  • organisational changes
  • government policy
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8
Q

what is substitution in supply?

A

there are two goods where an increased production of one means diverting resources away from producing the other

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9
Q

what are goods in joint supply?

A

there are two goods where the production of more of one leads to the production of more of the others

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10
Q

what is change in supply?

A

term used for the shift in supply curve, happens when a determinant other than price changes
- changes in quantity supplied is used for movement along the curve to a new point due to change in price

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11
Q

what is market clearing?

A

a market clears when supply matches demand, leaving no shortages or surplus. the market is in equilibrium

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12
Q

what is minimum price?

A

a price flow set by the government on some other agency. the price is not allowed to fall below this level (although its allowed to rise above it)

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13
Q

what is maximum price?

A

a price ceiling set by the government on some other agency. the price is not allowed to rise above this level, its not allowed to fall below it

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14
Q

what happens when demand or supply curve shifts?

A

it will lead to either a shortage or a surplus. price will either rise of fall until a new equilibrium is reached at the position where the supply and demand curves intersect

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15
Q

what affects competition?

A
  • the number of firms
  • the freedom of entry and exit of firms into the industry
  • the nature of the product
  • the shape of the demand curve
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16
Q

how does the number of firms affect competition?

A

the more firms there are competing against each other, the more competitive any market is likely to be, with each firm trying to steal customers from its rivals

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17
Q

how does freedom of entry and exit of firms into the industry?

A

in some markets, there may be barriers to entry that prevent new firms from entering and this then acts to restrict the numbers of competing firms in the market

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18
Q

how does the nature of the product affect competition?

A

if firms produce an identical product, there is no product differentiation within the industry and so there is little a firm can do to gain an advantage over its rivals.
- if firms however produce their own particular bran or variety it may allow them to charge higher and gain a higher market share

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19
Q

how does the shape of the demand curve affect competition?

A

its affected by the degree of control the firm has over its price. ie is demand elastic or inelastic

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20
Q

what is perfect competion?

A
  • a market structure in which there are many firms,
  • there is freedom of entry in the industry,
  • all firms produce an identical product
  • all firms are price takers,
    = its at the most competitive extreme
  • horizontal demand curve where P=MC
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21
Q

what is monopoly?

A
  • there is only one firm in the industry, - its the least competitive extreme and - no competition due to high barriers to entry
  • downward sloping, more inelastic than oligopoly. Firm has lots of control over price
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22
Q

what is imperfect competition?

A

the collective name for monopolistic competition and oligopoly

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23
Q

what is monopolistic competition?

A
  • a structure where, like perfect competition there are many firms
  • very low barriers of entry into the industry,
  • each firm produces a differentiated product and thus has some control over its price
  • sits in the middle of the scale
  • downward sloping demand curve but relatively elastic
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24
Q

what is oglipoly?

A

a structure where there are few enough firms to enable
- Has a few barriers to be erected against the entry of new firms
- firms will tend to have quite a high market share and will be dominant
- slightly different goods
- has kinked demand curve

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25
Q

what are the assumptions that perfect competition market is built on?

A
  1. firms are price takers: as they’re many firms, each one produces a small proportion of the industry supply and so they have no power on the price of the product and so faces a horizontal and perfectly elastic demand curve at market price (the price determined by interaction of supply and demand)
  2. firms produce identical products: firms dont engage in any advertising or branding as they’re homogenous
  3. complete freedom of entry into the industry for new firms: existing firms cant stop new ones
  4. producers and consumers have perfect knowledge of the market, they’re fully aware of the prices, costs, tech and market opportunities
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26
Q

what is short run under perfect competition?

A

the period during which there is too little time for new firms to enter the industry
- All firms in perfectly competitive markets are price-takers.
- They can sell all their output at prevailing market price.

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27
Q

what happens to price, output and profit? for a short run under price competition?

A

price: its determined in the industry by the intersection of market demand and supply. the firm faces a horizontal demand curve at this price, it can sell all its product at the market price and not above price P0
output: firm will maximise profit where marginal costs = marginal revenue at an output of Qp. As MR is not affected by price, revenue will = price
profit: if the AC curve dips below the average revenue curve, the firm will earn supernatural profit. this profit per unit is the vertical difference between AR and AC at
- a firm wouldnt be able to make profit at any level output would occur if the AC curve were above the AR curve at all points

28
Q

what is long run under perfect competition?

A

the period of time that is long enough for new firms to enter the industry.
- The firm maximizes profit at the output Q, where marginal cost
equals marginal revenue. (MC=MR)
- in the long run, supernormal profits exist ->new firms enter pushing curve right ->market equilibrium price lowers ->profits return to normal
-

29
Q

what is the effect of the entry of new firms or expansion of current ones?

A

to increase industry supply meaning that at every price level the quantity produced would be higher
- the industry supply curve shifts right, which leads to a fall in price, this will continue until firms are only making normal profit
- when price falls to point where the demand curve for the firm just touches the bottom of its long run average cost firm

30
Q

why is perfect competition and economies of scale incompatiabke?

A

firms have to be quite big if they want to experience economies of scale, but perfect competition requires there to be many firms, therefore they have to be small, so they are then too small to achieve economies of scale
- once a firm expands to achieve economies of scale, it will gain market power, and so undercut prices of smaller firms which will destroy perfect competition

31
Q

how does perfect competition affect the firm?

A

it faces a constant battle of survival. if it becomes less efficient than other firms, it will make less profit and be driven out of business
- if it becomes more efficient, it will earn supernormal profits, forced to copy the more efficient methods of the new firms which they can do due to assumption of perfect knowledge

32
Q

how does perfect competition affect the consumer?

A

firms are encouraged to invest in new tech to ensure survival, and in the long run may also produce the least-cost output to ensure normal profits are made, -> productive efficiency.
- also see firms producing the level of output where price = MC which could be argued as optimal level of output
- perfectly competitive markets result in economic efficiency

33
Q

what is productive efficiency?

A

a situation where firms are producing the maximum output for a given amount of inputs, or producing a given output at the least cost

34
Q

what is allocative efficiency?

A

where current combo of good produced and sold give the maximum satisfaction for each consumer at their current level of income

35
Q

what are the barriers to entry for a firm in a monopoly?

A
  1. economies of scale: if the monopolists average costs continue falling up to the output that satisfies the whole market, the industry may not be able to support more than one producer -> natural monopoly
  2. economies of scope: benefits of lower average costs of production means a firm produces a range of products, which makes it difficult for a new firm to enter the market
  3. product differentiation and brand loyalty: if a firm produces a differentiated product, where the consumers associate the product with the brand it will be difficult for a new firm to enter
  4. lower costs for established firms: an established monopoly is likely to have developed the most efficient way of producing and marketing its product and this will be difficult for others to replicate
  5. access to and control over ownership of key inputs or outlets: some monopolists may be able to obtain access to key inputs on more favourable terms for some time
  6. legal protection: firms monopoly protection may be protected by patents on processes
  7. mergers and takeovers: monopolist can put in a takeover bid for any new entrant and so discourage new entrants
  8. retained profits and aggressive tactics: an established monopolist will have some retained profits which they can use to help it sustain losses which engages in a price war with competitors
36
Q

what is a natural monopoly?

A

where long run average costs would be lower if an industry were under monopoly than if it were shared between two or more competitors

37
Q

what is switching costs?

A

the costs to a consumer of switching to an alternative supplier

38
Q

what is network economies?

A

the benefits to consumers of having a network of other people using the same product or service

39
Q

what is competition for corporate control?

A

the competition for control for companies through takeovers

40
Q

what is perfectly contestable market?

A

a market where there is free and costless entry and exit

41
Q

what are sunk costs?

A

costs that cannot be recouped eg by transferring assets to others

42
Q

where are profits for a monopoly firm made?

A

its maximised where MC =MR

43
Q

what happens when demand and cost curves are the same for monopoly and perfectly competitive industry?

A

the monopoly will produce a lower level of output and at a higher price than the perfectly competitive industry
- any economies of scale may in part be passed on to consumers in lower prices, and the monopolists high profits may be used for R&D, and investment which in turn may lead to better products at lower prices

44
Q

what is the theory of contestable markets?

A

potential competition may be as important as actual competition in determining a firms price and and output strategy

45
Q

what happens when there is a greater threat of this competition

A

the lower are the entry and exit costs to and from the industry. If the entry and exit costs are zero, the market is said to be perfectly contestable. Under such circumstances, an existing monopolist may be forced to keep its profits down to the normal level if it is to resist entry of new firms. The lower the exit costs, the lower are the sunk costs of the firm.

46
Q

what does the theory of contestable markets provide?

A

a more realistic analysis of firms behaviour than theories based simply on the existing number of firms in the industry

47
Q

what is monopolistic competition?

A

where there are lots of firms competing, but where each firm does have some market power, so they have some discretion as to what price change for its products because they are differentiated
- low barriers to entry

48
Q

what is independence?

A

where the decisions in one firm in a market will not have any significant effect on the demand curves of its rivals

49
Q

what are the assumptions of monopolistic competition?

A
  1. quite large number of firms: each one has a small share of the market, and so actions are unlikely to affect its rivals -> independence
  2. Some barriers of entry for new firms:
  3. differentiated products: each firm produces diff products from each other, which gives firms market power -> product differentiation
50
Q

what is product differentiation?

A

when one firms product is different from its rivals, it can raise the price of the product without customers matching to the rivals -> gives a downward-sloping demand curve

51
Q

what is a firm in monopolistic competition in the short run like?

A
  • profits are maximised at where MR=MC. AR and MR curves will be more elastic, due to more competition, how much profit it makes depends on the strength of demand: the position and elasticity of the demand curve.
  • the further to the right the demand curve is relative to the AC curve and the less elastic the demand curve is, the greater the firms short run profit is
52
Q

what is a firm in monopolistic competition in the long run like?

A
  • New firms enter the industry attracted by supernormal profit
  • New firms entering reduce demand for each individual firm and give consumers more products to choose from
    (making demand curves more elastic (flatter).
  • ZERO Supernormal profit can be earned in the long-run.
53
Q

what happens in the transition from the short run to the long for firms under perfect competition?

A

new firms enter or leave the market, its the industry supply curve that shifts, which changes the market price and leaves just normal profits

54
Q

what happens in the transition from the short run to the long for firms under monopolistic competition?

A

the entry of new firms is reflected by shifting an established firms demand curve inwards and elimniates supernormal profits

55
Q

what happens in the transition from the short run to the long for firms under monopolistic competition?

A

the entry of new firms is reflected by shifting an established firms demand curve inwards and eliminates supernormal profits

56
Q

what are the limitations of the monopolistic competition model?

A
  1. info may be imperfect: firms wont enter industry if they’re unaware of the supernormal profits being made
  2. firms will differ from each other, entry many not be completely unrestricted eg two same businesses cant open in the same place
  3. existing firms may make supernormal profits but new firms might reduce everyone’s profit below normal level. so a new firm wont enter and supernormal profits may last into the long run
  4. model concentrates on price and output decisions. in practice a profit-maximising firm under this situation will decide the exact variety of product to producer and how much to spend on advertising etc which lead the firm to practice in non-price competition
57
Q

what is it argued that monopolistic competition leads to?

A

a loess efficient allocation of resources than perfect competition.
- two assumption cans be made about monopolstic competition:
less will be sold at a higher price and firms wont be producing at the least-cost point

58
Q

what is excess capacity (under monopolistic competition)?

A

in the long run, firms under this environment will produce at an output below that which minimises average cost per unit

59
Q

how does monopolistic competition affect consumers?

A

Although the firm under monopolistic competition may charge a higher price than under perfect competition, the difference may be very small. Although the firm’s demand curve is downward sloping, it is still likely to be highly elastic due to the large number of substitutes. Furthermore, the consumer may benefit from monopolistic competition by having a greater variety of products to choose from. Each firm may satisfy some particular requirement of particular consumers.

60
Q

what is the comparison of monopolistic competition with monopoly?

A
  • freedom of entry for new firms and hence the lack of long-run supernormal profits under monopolistic competition are likely to help keep prices down for the consumer and encourage cost saving.
  • but monopolies are likely to achieve greater economies of scale and have more funds for investment and research and development
    M-Comp means higher Price and lower output
  • Also MC loses technical and allocative efficiency
    Costs of maintaining MC..
61
Q

On a graph what is a contraction and extension on the demand curve?

A
  • a contraction is due to higher price leading to lower demand, arrow points up on demand line
  • a extension is due to lower price leading to higher demand, arrow points down on demand line
62
Q

On a graph, what is an extension and contraction on a supply curve mean?

A
  • a higher price causes an extension along the curve (more is supplied), arrow point up on line
  • a lower price causes a contraction along the curve (less is supplied) arrow points down on line
63
Q

What does free unrestricted entry mean for supernormal profits?

A

There is zero supernormal profits in the long run

64
Q

What does the perfect knowledge in oligopoly mean?

A

They have perfect knowledge of their own cost and demand

65
Q

How do you calculate supernormal profits?

A

TR minus TC

66
Q

What is a competitive firm’s marginal revenue equal to?

A

MR is always equal to its AR and Price

67
Q

What is X-inefficiency in monopoly?

A

When a firm lacks incentive to control costs

ECON (10 decks)

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