Year 13 microeconomics Flashcards
Monopoly features…
- Single firm dominates the market.
- Firm is a price-maker.
- Firm is a profit-maximiser.
- High barriers to entry and high barriers to exit.
- Imperfect information.
Perfect competition and its features…
- It’s a theoretical thing that does not actually exist…
Features such as: - Consumer + producers have perfect information
- Firms are profit maximisers
- No barriers to entry or barriers to exit.
- Infinite no. of suppliers and consumers.
- Products are homogenous + no brand loyalty.
(This does NOT lead to DYNAMIC EFFICIENCY but RATHER STATIC EFFICIENCY)
What’s dynamic efficiency?
- Improving effficiency in the LR via investment in R&D,training etc.
What’s x-efficiency?
- Measures how successfully a firm can keep its costs down.
X-inefficiency is when firms waste FoPs or pay too much for FoPs.
What’s static efficiency?
- When productive and allocative efficiency is achieved, they eventually would become outdated.
Where are profits max. on a diagram?
MC = MR
Where are sales max. on a diagram?
AC = AR
Where is allocative efficiency on a diagram?
P = MC OR AC = MR
(The price links with marginal cost due to what consumers would pay)
(AC = AR) is sales max.
When do SRAC curves shift above LRAC?
(EoS—->Diseconomies of scale with LRAC curve under)
- SRAC curves shift when ALL FoPs change.
What is a deadweight welfare loss?
- A loss to society that cannot be recovered.
Monopolistic competition features…
(Realistic market structure)
- Many buyers and sellers
- Slightly differentiated goods
- Firms are price-makers
- Price elastic demand
- Low barriers to entry and barriers to exit
- Good information
- Firms are profit-maximisers
- Non-price competition
- Firms don’t fully benefit from EoS (especially in the LR)
Reasons for high barriers to exit
- Sunk cost fallacy
- Govt. regulation or patents
Reasons for high barriers to entry
- High start-up costs
- Govt. regulation
- Patents
- Price wars/aggressive pricing tactics
- Brand loyalty.
Monopolistic competition in the SR and LR
SR - supernormal profits made (AR > AC)
LR - Normal profits made (AR = AC) with tangential AC curve -> not productively efficient as not producing on lowest point of AC + Not allocatively efficient at P > MC
Define price discrimination…
- When sellers charge different consumers different prices for exactly the same product.
Conditions for price discrimination…
- Some monopoly power
- Seperate different consumer via PED, e.g. inelastic PED = charge higher prices and elastic PED = charge lower prices
- Good information
- ## Prevent re-sale, (prevent someone else from buying lower and selling higher…)
Types of price discrimination…
- (1st degree) When consumers are charged the maximum they’re willing to pay, (eliminating consumer surplus and turning it into revenue for the firm).
- (2nd degree) Used in wholesale markets when lower prices are charged to people who purchase high quantities, (Consumer surplus turns into supernormal profit).
- (3rd degree) When a firm charges different prices for the same product to different segments of the market, e.g. higher prices for inelastic PED and lower prices for elastic PED.
Pros and cons of price discrimination…
+ Consumer surplus turned into revenue could mean that the revenue could be reinvested into the firm. +++
+ Despite consumers not treated equally, people with higher incomes often pay more. +++
- EoS means lower AC can be passed on to consumers in low prices +++
- No allocative efficiency as P = MC or (AR= AC) not met, as AR > MC. —
No allocative efficiency overrides all the pros so its not a good thing!
Oligopoly features…
The theoretical model:
- Few firms dominate the market
- High concentration ratio (7 firms with approx. 70% market share)
- Differentiated goods + Firms are price-makers
- High barriers to entry and high barriers to exit.
-> Firms’ INTERDEPENDENCE + price rigidity (prices don’t change easily).
- Profit max. not sole objective!
- Oligopolies can be collusive or non-collusive.
(Links to kinked demand curve)
e.g. car market, fuel providers, airlines etc
Firms’ objectives
- Max. profit
- Max. revenue (perhaps for the SR) where MR = 0.
- Profit satisficing…
- To aid others e.g. NGOs.
(Maximising profit might only be an objective for the LR).
Define labour productivity…
- Output per hour worked.
What do concentration ratios show?
- Shows how dominant the big firms are in a market.
Factors that promote a COMPETITIVE oligopoly…
- Many firms (oligopoly with less concentration ratio)
- New market entry possible (low barriers to entry)
- One firm with significant cost advantages (may open up chances for collusion)
- Homogenous goods
- Saturated market (price wars etc happen to gain market share)
Pros and cons of a Competitive oligopoly market…
- Allocative, produtive and x-efficiency gained, and static efficiency lost.
- However, dynamic efficiency lost and EoS benefits lost.