Week 7: Market Structure & Performance Flashcards
1
Q
The theory of the invisible hand states that:
A
Under certain conditions, the optimising behaviour of individuals and firms under perfect competition leads to an efficient social outcome
2
Q
Examples of Market Failure:
A
- Firms using their monopoly market power
- Firms using their monopsony market power
- Unions using their monopoly market power
3
Q
A firm is considered a monopoly if:
A
- It is the sole seller of its product
* Its product does not have close substitutes
4
Q
Why Monopolies arise:
A
- Monopolies are caused by barriers to entry where firm
- Owns a key resource
- Has exclusive production right from govt
- Has production costs much lower than many smaller producers.
5
Q
An increase in a monopoly’s sales has two effects on TR (or PQ):
A
- The output effect where more output is sold, so Q is higher
- The price effect where price falls, so P is lower.
6
Q
Price discrimination is when
A
the same good is sold at different prices to different customers, even though the production costs for the two customers are the same.
7
Q
Two effects of price discrimination:
A
- It can increase the monopolist’s profits
- It can reduce deadweight loss
8
Q
Types of Price Discrimination:
A
- First degree price discrimination (Charge different price for each unit (appropriate all consumer surplus, but no deadweight loss).
- Second degree price discrimination (Discounts for bulk purchases).
- Third degree price discrimination (Segmenting market by elasticity).
9
Q
Examples of price discrimination:
A
- Movie tickets
- Store brands
- Airline prices
- Discount coupons
- Quantity discounts
