yr 12

Question 1

why does the demand curve slope downwards?

Answer 1

-income effect
-substitution effect
-law of diminishing marginal utility

Question 2

features of perfect competition

Answer 2

-many small firms
-homogenous goods
-all firms are price takers
-perfect knowledge
-freedom of entry and exit
-all factors of production are variable

Question 3

what are the features of oligopoly?

Answer 3

-few large firms
-firms must be interdependent
-high barriers to entry
-non price competition(due to sticky prices/price rigidity)

Question 4

what are the features of monopolistic competition?

Answer 4

-large numbers of buyers and sellers; all act independently; low concentration ratio
-in the LR, low/no barriers to entry
-firms produce differentiated/non homogeneous goods (competition is strong, many substitutes)
-producers have some control over price
-information is widely spread but not perfect
-in the SR, barriers are high (start up costs: technology -> trials/app development, R&D)

Question 5

what are the features of a monopoly?

Answer 5

-only one firm
-complete barriers to entry
-firm is a price maker

Question 6

why can’t a perfectly competitive firm earn supernormal profit?

Answer 6

-firm makes supernormal profit through lowering AC or innovation
-any supernormal profit means other firms are incentivised to enter (perfect knowledge)
-no barriers to entry
-D moves down to D1, due to a shift in supply (normal profit)
-creates a new market price
-firm is a price taker so it stays in the market
-at normal profit, no incentive to enter the market

Question 7

why is demand perfectly elastic in a perfectly competitive firm?

Answer 7

-no demand at another price
-addition to the revenue is just another P

Question 8

why does a monopolistically competitive firm make supernormal profits in the SR?

Answer 8

-the firm has some market power from product differentiation
(branding, quality)
-gives firm some price setting ability
-we assume that all firms are SR profit maximisers
(so Q occurs where MC = MR)
-AR > AC so SP is being earned
-in the SR, other firms may not offer close substitutes
-so firms can raise price & face less competition
-supernormal profit can be earned temporarily

Question 9

why does the demand curve slope downwards in a monopolistically competitive firm?

Answer 9

-product differentiation means there is less price sensitivity
(PED is inelastic)
-so when price is raised, firm can still retain consumers
-consumers have brand loyalty so they are less likely to switch to substitutes
(because substitutes aren’t perfect)

Question 10

why does a monopolistically competitive firm earn normal profits in the LR?

Answer 10

-information widely spread
-firms enter market and compete so supernormal profit is eroded away

Question 11

what is first degree price discrimination?

Answer 11

when the discriminating firm can charge a separate price to each individual customer

Question 12

what is second degree price discrimination?

Answer 12

when the discriminating firm can charge a different price for different quantities (bulk purchases -> quantity discounts)

Question 13

what is third degree price discrimination?

Answer 13

when the discriminating firm can charge a separate price to different groups of customers

Question 14

what is the theory of contestablility?

Answer 14

argues that what matters is the absence of barriers to entry and the level of sunk costs

Question 15

what the features of market structures?

Answer 15

-number of firms
-product differentiation
-ease of entry/barriers to entry
-extent to which knowledge/information is perfect
-influence of individual firms/suppliers on price

Question 16

what do the CMA control?

Answer 16

-monopolies
-restrictive trade practices
-mergers/takeovers

Question 17

what is collusion?

Answer 17

when firms cooperate in their pricing, marketing, R&D and/or output policies

Question 18

at prices above P…?

Answer 18

-firms face an elastic demand curve
-consumers will go to other firms (substitutes)
-revenues would fall

Question 19

at prices below P…?

Answer 19

-firms face an inelastic demand curve
-assuming competitors will lower their prices too (quantity demanded will increases a bit)
-revenues will fall

Question 20

what are the features of contestable markets?

Answer 20

-number of firms
-freedom of entry/exit
-firms compete with each other
-firms may produce homogeneous goods or branded goods
-perfect knowledge in the industry

Question 21

what is interdependence?

Answer 21

when the actions of one firm will have an effect on the sales and revenue of other large firms in the market

Question 22

what are the types of barriers to entry?

Answer 22

-natural (start up costs): nature of the good (oil extraction)
-artificial: created by the government
-patents: prevents someone from copying a good or process
-product differentiation: already created a good that meet all the needs of consumers

Question 23

what is x-inefficiency?

Answer 23

aka organisational slack: when a firm lacks the incentive to control costs

Question 24

what are the reasons for x-inefficiency?

Answer 24

-wastage
-bonuses/expenses (CEO’s)

Question 25

where does the price come from in a perfectly competitive firm?

Answer 25

price comes from the market price

Question 26

what is the concentration ratio?

Answer 26

a ratio that indicates the total market share of a number of leading firms in a market

Question 27

what are sticky prices/price rigidity?

Answer 27

prices that are unlikely to change (otherwise revenue falls)

Question 28

what does interdependence create?

Answer 28

-creates uncertainty in the actions of other firms -unsure how other firms will respond (if one firm redesigns, other may use new technology)

Question 29

what is price discrimination?

Answer 29

charging a different price to different customer’s for the same product/service with the prices based on different willingness to pay

Question 30

what are examples of price discrimination?

Answer 30

cinema tickets (child vs adult) university insurance

Question 31

what conditions are necessary for price discrimination?

Answer 31

-must be possible to identify different groups of customers easily -different customers must have different PED’s -markets need to be able to prevent resale (need to be a price maker)

Question 32

what are methods of price discrimination?

Answer 32

-geographical -time -age of customer -quantity bought

Question 33

why is price discrimination done?

Answer 33

for profit maximisation

Question 34

why is consumer surplus eliminated in first degree price discrimination?

Answer 34

-consumers are willing to pay the price the firm has given them -rationality means why pay more? -trade off because producer surplus is maximised (due to profit maximisation) so consumer surplus is lost

Question 35

why is the demand curve combined for price discrimination?

Answer 35

some gain consumer surplus because they are willing to pay more

Question 36

if there was one price for all consumer surplus would be…?

Answer 36

greater

Question 37

what happens when a firm earns more profit?

Answer 37

consumer surplus falls

Question 38

how is consumer surplus gained in second degree price discrimination?

Answer 38

-consumers would need to pay the lower price -but they’re never able to, so the unit gained is consumer surplus (bulk buying)

Question 39

what are some evaluations for price discrimination?

Answer 39

-depends on what type (first, second or third) (even within each group some surplus gained) -trade off in surplus, any loss in consumer surplus is a gain in producer surplus (means for dynamic efficiency) -cross subsidisation for merit goods -> equitable(museums)

Question 40

does a perfectly competitive firm have means/incentives for dynamic efficiency?

Answer 40

-no means because they don’t earn supernormal profit -no incentive because when supernormal profit is earned, other firms enter the market so supernormal profit is eliminated -yes incentive because as long as there’s any period of supernormal profit, there’s incentive (regardless of having means or not)

Question 41

what is dynamic efficiency?

Answer 41

it occurs in the LR over time, leading to the development of new products and more efficient processes that improve productive efficiency (supernormal profit is required)

Question 42

does a monopoly have means/incentives for dynamic efficiency?

Answer 42

-yes it has means (supernormal profit earned) -no incentive, assuming all firms are SR profit maximisers, AC would rise if they use R&D for the product

Question 43

what is the tragedy of the commons?

Answer 43

where individuals acting in their self interest, overuse a shared resource with the result that it is depleted and degraded (neg externality in supply)

Question 44

examples of tragedy of the commons are...?

Answer 44

-overtrading -overfishing

Question 45

how can the tragedy of the commons be avoided?

Answer 45

property rights: -eliminates externality -doesn't always work (usually better for land instead of air/water)