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Economics Micro > Yr1/2 Perfect Competition, Imperfectly Competitive Markets and Monoploy > Flashcards

Yr1/2 Perfect Competition, Imperfectly Competitive Markets and Monoploy Flashcards

1
Q

CONTINUE FROM FLASHCARD 58

A
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2
Q

PART 1

A

MARKET STRUCTURES

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3
Q

Definition of market structures

A

The organisational and other characteristics of the market. Focus on the characteristics which affect the degree of competition between firms and their purchasing decisions

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4
Q

The conduct and behaviour of the market depends on…. (5)

A
  1. Are there dominant firms
  2. Is there evidence of anti-competitive behaviour
  3. How important is non-price competition
  4. Is there interdependence between firms
  5. Do businesses behave strategically to retain profits
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5
Q

Factors affecting conduct and performance (reasons why a firm can or cannot dominants linked to (1) costs and (2) the product

A

Costs
- entry costs
- sunk costs > money that cannot be got back if the firm leaves the market
- natural cost advantage

Product
- homogenous goods (same characteristics)
- non-homogenous goods
- strong product differentiation and brand loyalty allows firms to charge higher prices

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6
Q

What are some performance indicators within a market?

A
  1. Trends in real price levels overtime
  2. Size of business profits
  3. Spending on research and development
  4. Spending on human capital
  5. Productivity
  6. Efficiency
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7
Q

What are sunk costs?

A

Money that cant be recovered if a firm leaves the market

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8
Q

What is a homogenous product?

A

When there are no distinguishing characteristics e.g. potatoes

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9
Q

What is total revenue?

A

All the money made by a business (unit price x quantity)

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10
Q

What are total costs?

A

The sum of all the costs to a business (FC+VC)

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11
Q

What is average costs?

A

The cost per unit of producing a good (TC/TO)

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12
Q

What is marginal revenue?

A

The additional revenue generated from selling an additional unit (change in revenue / change in quantity sold)

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13
Q

What are marginal costs?

A

Additional costs incurred from making an additional unit (change in costs / change in quantity produced)

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14
Q

What are barriers to entry and exit?

A

Factors that prevent or make it difficult for new firms to enter a market

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15
Q

What are some barriers to entry for
(1) coffee shops
(2) pharmacist

A

(1)
- brand loyalties
- high rent costs
- high levels of competition
(2)
- qualifications
- high supply costs

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16
Q

What are the 4 types of barriers to entry?

A
  1. Structural barriers
  2. Strategic barriers
  3. Legal barriers
  4. Restrictive practises
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17
Q

Give examples of structural barriers to entry?

A
  • economies of scale
  • vertical integration
  • control essential technologies / commodities
  • expertise and reputation
  • customer (brand) loyalty / inelastic demand / network effect
  • investment
  • R+D
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18
Q

Give examples of strategic barriers to entry?

A
  • predatory pricing
  • marketing / product differentiation / advertising
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19
Q

Give examples of legal barriers to entry?

A
  • intellectual property rights
    > licences, patents, copyright, trademark
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20
Q

Give examples of restrictive practises?

A
  • franchises
  • tariffs/quotas/trade restrictions
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21
Q

What are the four key barriers to exit? (And some examples)

A
  1. Asset-write-off
    - plant + machinery
    - stock
  2. Sunk costs
  3. Potential upturn
  4. Closure costs
    - redundancy costs
    - contracts with suppliers / leases
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22
Q

What is customer loyalty? (In terms of barriers to entry and exit)

A

It means new businesses have barriers to entry as demand is inelastic for existing businesses

Therefore, there are not enough consumers to make the firm viable
- consumers have less options to substitute

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23
Q

Market structure factors (8)

A
  • the number of firms in the industry
  • the nature of the product produced
  • the degree of monopoly power each firm has
  • the degree to which the firm can influence price profit levels
  • firms behaviour - pricing strategies, non-price competition, output levels
  • the extent of barriers to entry + entry
  • the impact on efficiency
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24
Q

List the type of market structures from most competitive to least competitive

A

Most
1. Perfect competition
2. Monopolistic competition
3. Oligopoly
4. Duopoly
5. Monopoly
6. Pure monopoly
Least

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25
Q

PART 2

A

THE OBJECTIVES OF FIRMS

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26
Q

What are the 4 key objectives of firms? (And where are they placed on a market structures diagram)

A
  1. Profit maximisation (MC=MR)
  2. Revenue maximisation (MR=0)
  3. Sales maximisation (AC=AR)
  4. Efficiency
    - allocative (P=MC)
    - productive (AC=MC)
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27
Q

What is profit satisficing and give some examples of people who could be involved?

A

When a firm makes enough money to satisfy its influencers e.g. shareholders, employees, suppliers etc

28
Q

What is revenue maximising?

A

Where MR=0
Prior to this point, MR is positives and therefore, adding to total revenue. However, after this point, marginal revenue is negative and total revenue decreases

29
Q

What is sales maximisation?

A

When AC=AR
Where a firm sells as much as it can without making a loss and can only achieve ‘normal’ profit

30
Q

What is allocative efficiency?

A

Where MC=AR (or P)
The optimal distribution of goods and services

31
Q

What is productive efficiency?

A

When MC=AC
The turning point of AC

32
Q

What are the three types of profit in terms of firm objectives?

A
  • abnormal profit
  • normal profit
  • profit maximisation
33
Q

What is abnormal (super) profit?

A

Profit over and above normal profit. Also known as super-normal profit and above-normal profit

34
Q

What is normal profit?

A

The minimum profit a firm must make to stay in business, which is however, insufficient to attract new firms into the market

35
Q

What is profit maximisation?

A

Occurs at the level of output which total profit is greatest

36
Q

PART 3

A

PERFECT COMPETITION

37
Q

What are the characteristics of a perfectly competitive market?

A
  • many suppliers and consumers
  • price takers
  • homogenous product
  • perfect substitutes
  • perfect information
  • no barriers to entry or exit
  • abnormal profit in the SR
38
Q

Examples of a perfectly competitive market (not completely perfect)

A
  • foreign exchange
  • betting
  • car auctions
  • street roast
39
Q

What are the 5 graphs for a perfectly competitive market?

A
  1. SR - industry
  2. SR - firms
  3. LR - industry
  4. LR - firms
  5. Reason for leaving the market
40
Q

What is needed for entry and exit strategies for monopolistically competitive markets?

A

Entry
- abnormal profits attract firms to the industry + no barriers to entry make it easy to set up

Exit
- normal profit in the LR has to be made to justify staying in the market
- in the SR, they will operate as long as the price per unit is greater than or equal to average variable costs

41
Q

What does price have to equal for a firm to stay in a perfectly competitive market?

A

Where AC and MC meet

42
Q

PART 4

A

MONOPOLISTIC COMPETITION

43
Q

What are some examples of monopolistic competition?

A
  • coffee shops
  • hairdressers
  • cereal
  • shoe repairs and key makers
  • night clubs + bars
  • taxi companies
44
Q

Definition of monopolistic competition

A

A market structure in which slightly differentiated products are sold by a large number of relatively small producers, and in which the barriers to new firms entering the market are low

45
Q

Characteristics of monopolistic competition

A
  1. Many firms
  2. Many customers
  3. Slightly differentiated market
  4. Price makers (more control)
  5. Non-price competition : branding, advertising
  6. Low barriers to entry and exit
  7. Abnormal profit in the SR, normal in the LR
  8. Imperfect knowledge
46
Q

What are the four types of differentiation within monopolistic competition and what do they entail?

A
  1. Physical product differentiation
    - highlighting physical attributes
  2. Marketing differentiation
    - different strategies used to stand out due to competitors
  3. Human capital differentiation
    - differences in the intangible asset or quality an employee has
  4. Differentiation through distribution
    - how the product / service is sold to a consumer
47
Q

What are the two graphs for monopolistic competition?

A
  1. SR
  2. LR
48
Q

PART 5

A

OLIGOPOLY

49
Q

Characteristics of an oligopoly?

A
  1. A few large firms have the majority market share
  2. Only a few firms dominate
  3. High barriers to entry and excit e.g. sunk costs and marketing
  4. Products could be highly differentiated >branding or homogenous
  5. Non price competition
  6. Price stability within the market “sticky pricing”
  7. Potential for collusion
  8. Abnormal profits > depending on the market e.g. elasticity, pricing structure, fewer firms
  9. High degree of interdependence between firms
50
Q

Examples of markets with the oligopoly structure

A
  • supermarkets
  • banking industry
  • chemical industries
  • oil-petrol stations
  • medical drugs
  • broadcasting
  • bookshops
51
Q

How do you measure if a market is an oligopoly?

A

The concentration ratio which is the proportion of the market share accounted for by the top X number of firms

Can also be the smallest number of firms with >70% market share etc

52
Q

What is game theory?

A

Concerned with predicting the outcome of games of strategy in which the participants (for example two or more businesses competing in the market) have incomplete information about the others’ intentions

53
Q

What is nash equilibrium in terms of oligopolies?

A

The point where both firms set a low price and lose out

54
Q

What is the dominant strategy in terms of oligopolies?

A

Strategy that maximises potential earnings e.g. lowering prices

55
Q

What is Hotellings Model of Spatial Variation linked to oligopolies?

A

A model based on the assumptions that two or more firms have chosen their bounded location and are able to compete on price

56
Q

Conditions for collusion in oligopolies? (7)

A
  1. Few firms which know each other well
  2. Not secretive about costs + production methods
  3. Similar production methods and average costs > change prices at the same time and by the same percentage
  4. Produce similar products so reach agreements on price
  5. One firm take the dominant role
  6. Significant barriers to entry so there is little fear of disruption by new firms
  7. Market is stable e.g. demand or production costs
57
Q

Definition of tacit collusion?

A

Competitors agree on a strategy without communicating or writing it down

58
Q

Definition of formal collusion?

A

A formal agreement between competitors

59
Q

Collusion summary

A
  • competitive rivals may seek to rescue uncertainty by colluding to either fix a price, a level of output or allocate customers
  • by forming a cartel agreement all parities in the oligopoly can achieve a better outcome in terms of maximising profit
  • bad for consumers as they have limited choice or higher prices (illegal as laws to protect consumers)
60
Q

What are two examples of collusion involving the CMA?

A
  1. CMA were involved with Skyscanner (Online hotel booking system) due to the firm collaborating so certain sites had cheaper prices e.g. Expedia
  2. CMA fined Pharma companies Pfizer and Flynn Pharma nearly £90mn for charging excessive prices to the NHS for an anti-epilepsy drug (incr in prices by 2,600%)
61
Q
A
62
Q

PART 6

A

MONOPOLY AND MONOPOLY POWER

63
Q

PART 7

A

PRICE DISCRIMINATION

64
Q

PART 8

A

THE DYNAMICS OF COMPETITION AND COMPETITIVE MARKET PROCESSES

65
Q

PART 9

A

CONTESTABLE AND NON-CONTESTABLE MARKETS

66
Q

PART 10

A

MARKET STRUCTURE, STATIC EFFICIENCY, DYNAMIC EFFICIENCY AND RESOURCE ALLOCATION

67
Q

PART 11

A

CONSUMER AND PRODUCER SURPLUS

Economics Micro (8 decks)

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