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AQA Micro Economics Y1 > 1.5 Perfect competition, Imperfectly competitive markets and Monopoly > Flashcards

1.5 Perfect competition, Imperfectly competitive markets and Monopoly Flashcards

1
Q

What is a concentration ratio (CR)?

A
  • ratio that indicates the size of firm in relation to the industry
  • number of firms that domiate the market
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2
Q

What are the four barriers to entry?

A
  • Legal = patents, insurance, licenses
  • Technical = start up costs, sunk, EoS, natural monopoly
  • Strategic = Pricing - predatory, limit
    heavy advertising
  • Brand loyalty
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3
Q

What are some barriers to exit?

A
  • Sunk costs
  • Redundancy
  • Undervaluation of assets
  • Penalty for leaving contract early
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4
Q

What is Perfect Competiton?

A

Theoretical market structure that economists use to asses efficiencies of other market structures
- Many buyers & sellers
- Homogenous goods
- No barriers to entry/exit
- D = Price elastic
- perfect info
- profit max.
- firms can sell all output
- price takers

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5
Q

What is Imperfect Competition?

A

Type of market structure that has some but not all elements of perfect competition
- less firms in market
- differentiation
- some barriers
- suppliers can influence price
- D = downward sloping

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6
Q

What is Monopolistic Competition?

A

when there are many firms in market but there is some form of product differentiaion
- barriers = low

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7
Q

What is a Monopoly?

A

Price leaders - can charge high prices but restricted by gov.
Use promo to inform and persuade customers
Can increase sales revenue through increasing market size
have atleast 25% market share - in UK
barriers = high costs, EoS, legal barriers

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8
Q

What is a Oligopoly?

A
  • Only a few firms in market
  • compete on non-price
  • If one firm cuts price others are likely to follow
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9
Q

What is some objectives of firms?

A
  • profit satisficing
  • sales max.
  • revenue max.
  • profit max.
  • other
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10
Q

What is profit satisficing?

A
  • profit below profit max.
  • satisfices needs of owners or managers
  • covers TC
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11
Q

What is sales maximisation?

A

max sales to gain market share
increases size of firm

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12
Q

What is revenue maximisation?

A

max sales revenue
point where MR = 0

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13
Q

What is profit maximisation?

A

MR = MC

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14
Q

What are the assumptions of Perfect Competition?

A
  • Large no. of buyers and sellers
  • Able to buy/sell all output at market price
  • Homogenous goods
  • No barriers
  • Perfect knowledge
  • Profit max. (MR=MC)
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15
Q

In Perfect competition firms are price takers and can sell all output at market price
What does this lead to?

A
  • Will not lower prices
  • AND will not decrease as consumers will go to other firms
  • D = Perfectly price elastic
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16
Q

What are the Disadvantages of Perfect competition?

A
  • Limited choice for consumer
  • lack of investment
  • no incentive to innovate
  • Lack of EoS
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17
Q

Short run and Long run equilibrium in Perfect competition

A

(see notes 1.5.3)

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18
Q

What is Monopolistic competition?

A
  • Large no. of firms in market
  • Differentiated products
  • small degree of monopoly power
  • barriers = low –> strong competition
  • LR = no barriers
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19
Q

What are the main characteristics of monopoly power?

A
  • firms have independance regarding price and output
  • profit max. MC=MR
  • goods are partial subs, not perfect
20
Q

Short run and Long run equilibrium in Monopolistic competition

A

see notes 1.5.4

21
Q

How can firms in monopolistic competition compete?

A

Non-price
- advertising
- differentiation
- innovation
- brand loyalty

22
Q

What are the efficiencies in monopolistic competition?

A

Productive inefficiency
- firms do not operate at lowest point on AC curve

Allocative inefficiency
- firms set P>MC

Dynamic inefficiency
- supernormal profits gone in LR, however innovation occurs

X-efficiency (lower costs)
- firms must remain competiive

23
Q

What are the main characteristics of Oligopoly markets?

A
  • Few firms dominate market
  • differentiated good (price maker)
  • high barriers
  • interdependence
  • non-price competition
  • profit max is not the sole objective
24
Q

What is the market conduct (behaviour) in Oligopoly markets?

A
  • face uncertainty
  • interdependent in competitive oligopolies
  • can be non-collusive, collusive, and form cartels
25
Q

What is interdependence and what does it create in markets?

A

actions of one firm will impact other firms
- creates uncertainty as firms are unsure of how competitors will react

26
Q

What is collusion?

A

allows firms to operate closer to conditions of monopoly and reduce uncertainty
This could be ILLEGAL

27
Q

Why would firms collude?

A

firms often collude to segment the market geographically
- monopoly power in own geographical area
- allows inefficient firms to stay in business

28
Q

What is a cartel?

A

formal agreement between firms to collude in the operation of the market
- normally price fixing
- or fixing ouput levels

29
Q

Why would firms form cartels?

A

allows them to operate closer to conditions of monopoly
seen as against interest of consumer - ILLEGAL
HOWEVER, some cartels might be allowed if it is seen to be in the interest of the consumer

30
Q

How can oligopolistic firms act like a monopoly?

A

by colluding, firms can make supernormal profits where AR > AC

31
Q

How can cooperation be allowed in Oligopoly

A

if it is seen to be in the interest of th consumer
- e.g. innovate new production processes
- leads to better efficieny in the industry
- lowers cost of production
- benefits consumer as there is low prices

32
Q

What is price leadership?

A

dominant firms set the price, others follow

33
Q

2 types of price agreements in oligopoly?

A

EXPLICIT = firms overtly agree to set prices
IMPLICIT = tacit agreement to set prices, difficult for regulators to identifiy

tacit = no communication

overt = communicate

34
Q

Explain how non-collusive oligopoly works?

A

If firms A raises price, other firms will not drop price and gain market share as firm A sales will fall
Therefore, demand = price elastic
If firm A drops price, other firms will follow to retain market share
Therefore, demand = price elastic

suggests that in oligopoly firms are unlikely to raise or drop prices

35
Q

What is the Kinked demand curve?

A

1.5.5 see notes for kinked demand curve

36
Q

What is price rigidity in oligopoly?

A

price tends to be stuck , despite changes in demand and supply in the market

37
Q

What are the factors influencing price and output in oligopoly?

A

Collusive pricing - agree to set high price, restricts output
Predatory pricing - force competition out by setting low prices, high output to meet high demand
Limit pricing - operates above profit max (MC=MR)
Cost plus pricing - set price based on AC

38
Q

What are the investment and expenditure on R+D in oligopoly?

A

heavy investment
high level of capital investment, expenditure on fixed assets
lead to a stream of income in the future
R+D = barrier reducing threat

39
Q

What are the advertising and marketing policies in oligopoly?

A

Advertising = sunk cost, deters new entrants. establish brand loyalty
Marketing = differentiated from competition, new product development can increase demand and maintain brand loyalty

40
Q

What are the reasons for non-price competition in oligopoly?

A

reduces likely-hood of price wars
- as it leads to lower profits for firms

41
Q

Advantages of Oligopoly?

A
  • innovating to create competitive advantages
  • this is because they can reinvest supernormal profits, leading to dynamic efficiency (EoS)
  • HIghly competitive reducing costs
  • leads to low prices, and better quality for consumers
42
Q

Disadvantages of Oligopoly?

A
  • Reduces choice for consumers (high CR firms)
  • will act like monopolists, reducing output, increasing price
    leads to misallocation of resources and allocative inefficiency
  • Barriers to entry
    small competitive firms struggle to enter
  • Advertising = manipulate consumers
    leads to irrational decision making
  • Exhibit productive efficiency as they do not operate on the lowest point on LRAC curve
43
Q

What are the characteristics of a Monopoly?

A
  • only one firm in market
  • firm and market demand curve is same D = AR
  • profit maximises - MC=MR
  • makes supernormal profits as it produces where AR>AC
  • Price maker
  • opposite of perfect competition
44
Q

What are the efficiencies in Monopoly?

A

Productive inefficiency - occurs above the lowest point on the LRAC
Allocative inefficiency - as price does not reflect the value that consumers put on the product as P>MC
X-inefficiency - no incentives to keep costs low. lack of competition
Dynamic efficiency - firm makes supernormal profits in LR

45
Q

What are the advantages of Monopoly?

A

Economies of Scale
- lowers AC of production
- can charge low prices

Use retainted profits to invest in R+D
- creates dynamic efficiency as innovation leads to better processes lowering the LRAC curve
- better quality products can be developed as monopolies can invest without the threat of competiitors

46
Q

What are the disadvantages of Monopoly?

A

Removes competition due to barriers
- makes supernormal profits in LR by charging high prices
- leads to consumer being exploited

Can reduce choice for consumer and quality of products as there is no competition

AQA Micro Economics Y1 (5 decks)

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