Week 5 - Perfect Competitve Market Flashcards
3 Key Characteristics of a Market that influence a firm’s behaviour
1) Concentration - # and size distribution of firms in a market and their market share
2) Product Differentiation - Physical or Subjective differences in a consumer’s mind between rival firm’s products
3) Barriers to Entry - How difficult it is for a new firm to enter a market and compete with existing firms
What is a High Concentration + Examples
A small number of firms control a large market share
- Telecommunications and Power Companies
What is a Low Concentration + Examples
Large number of firms and no firms have any market power
- Food
Example of Product Diffentiation
Feature of a product that sets it apart from similar products (USP)
Types of Barrier to Entry + Examples
1) Legal - Government Regulation, Patent Rights
2) Nature - Technical, Costs, Financials
Structure of Perfect Competition Market Structure
Concentration: Large number of Sellers
Product Differentiation: Homogeneous Products
Barriers to Entry: Low Barriers
Structure of Monopolistic Competition Market Structure
1) Concentration: Many Sellers / Low Concentration
2) Product Differentiation: Differentiated Products
3) Barriers to Entry: Some Barriers
Characteristics of Oligopoly Market Structure:
1) Concentration: Few Sellers / High Concentration
2) Product Differentiation: Homogeneous or Differentiated
3) Barriers to Entry: High Barriers
Characteristics of Monopoly Market Structure
Concentration: One Seller
Product Differentiation: Unique; no close substitute
Barriers to Entry: High barriers or Blocked
Characteristics of a Perfectly Competitive Market
1) Large # of Buyers and Sellers (No impact on price)
2) Price Takers (No influence on price)
3) Homogeneous (identical) products
4) No Barriers to Entry
5) Perfect Information
6) Perfect Mobility of Factor Production
Impact of a firm being a price taker
They cannot sell the price below/higher than market, but they can increase or decrease output
Why must the demand curve of a firm be perfectly elastic
Since the price is assumed to be unchanged
Shape of firm’s demand curve if price taker and price market
1) Price Taker = Perfectly Elastic (constant)
2) Price Maker = Similar to Market Demand curve (sell more by lowering price)
Equation for Average Revenue (AR)
TR/Q = P x Q / Q = P
What equation do we have under Perfect Competition
P = D = AR = MR
Profit is going to be the highest when the difference between TR and TC is
The greatest
Profit Maximisation graphically occurs when
MR = MC and MC cuts MR curve from below
For Economic Profits we want
TR > TC or pi>0 is when P > ATC
What is the Normal Profit Point
Where we have broken-even (P = ATC, TR = TC, pi = 0)
How can a firm minimise losses
1) P < ATC = AFC + AVC
2) If P > AVC, firm still produces because at least some of the fixed costs are recovered
3) If P < AVC, firm shuts down as losses get bigger
Short run supply curve for a firm under PC is
MC curve above the minimum of the AVC
In the LR, firm can
Enter or exist freely in the market, labour and capital and perfectly mobile
In LR equilibrium, firms can only
Make a normal profit or zero economic profit
What are External Economies
Factors beyond the control of an individual firm lowers costs as the industry expands
Example of External Economies
As Computer industry expands, the cost of chips fall
What are External Diseconomies
Factors outside the control of a firm that raise the firm’s costs as industry output increases
Examples of External Diseconomies
As Wind industry expands, cost of water increases
What is a constant-cost industry
In a CCI, entry and exiting in the LR ensures that all firms earn zero profits and the price is P* = ATc minimum
What does constant cost industry suggests
All firms have access to the same technology and have the same cost structure, and this cost structure does not change as the industry grows (LR supply curve need not be perfectly elastic)
What is an Increasing Cost Industry
Occurs when potential entrants have higher costs than firms already in the market (LRSC can be upward sloping)
Why does Increasing costs industry occurs
Some resources used in production may be available only in limited quantities (input prices rise as industry expands)
What is a Decreasing-Cost industry
Supposing that as output in an industry expands, cost for all firms fall, LRSC is downward sloping
What causes a DCI
Following an increase in demand, as entry will continue until it is no longer profitable, new LR equilibrium price has to be lower than the initial equilibrium price
