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microeconomics > 1.5 perfect competition, imperfectly competitive markets and monopoly > Flashcards

1.5 perfect competition, imperfectly competitive markets and monopoly Flashcards

1
Q

monopoly

A

only one firm in the market

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2
Q

legal monopoly

A

over 25% market share

e.g. Tesco 29%

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3
Q

3 simplifying assumptions used to model monopolies

A

only one firm

high barriers to entry

firm is profit maximiser

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4
Q

profit maximiser

A

where MC+MR

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5
Q

only one firm

A

100% market share

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6
Q

higher barriers to entry

A

otherwise new firms join the market

e.g. Microsoft using patents to prevent other firms using similar technology

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7
Q

monopoly barriers to entry

A

legal barriers
sink costs
internal economies of scale
brand loyalty

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8
Q

how to legal barriers stop new firms entering the marker?

A

includes patents, copyrights, trademarks

they stop new firms using ideas of incumbent firms
(already in market)

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9
Q

how do sunk costs prevent new firms from entering the market?

A

money can’t be recovered if firms leaves the market

e.g. specialist machinery and advertising as you can’t resell specialist machinery

high sunk costs increase the cost of failure

if firm enters market and leaves, can’t recover sunk costs

deters new firms from entering

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10
Q

how do internal economies of scale prevent new firms from entering the market?

A

big firms use internal economies of scale to reduce LRAC

competitive advantage over smaller firms, able to produce much cheaper

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11
Q

how can technical economies of scale prevent new firms from entering the market?

A

can be used to produce things at a very low cost

small firms can’t afford the machinery

get to keep costs and prices very low creating a high barrier to entry

can’t compete with low prices

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12
Q

how can brand loyalty prevent new firms from entering the market?

A

strong branding from incumbent firms makes it impossible for new firms to enter the market

e.g. Coca Cola spends lots of money on advertising and when Virgin Cola entered the market it struggled

discontinued completely in 2014

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13
Q

example of brand loyalty causing new firms to fail

A

e.g. Coca Cola spends lots of money on advertising and when Virgin Cola entered the market it struggled

discontinued completely in 2014

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14
Q

productive efficiency

A

MC=AC

average total cost is at its lowest

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15
Q

allocative efficiency

A

welfare is maxmised
MC=AR=price=D
cost to producers of producing good matches price consumers are willing to pay

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16
Q

X-inefficiency

A

when a firm is producing above its average cost curve for a given level of output

monopolies can get lazy

costs could be higher due to poor management and excessive bonuses

costs of raw materials too high, accidents

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17
Q

dynamic efficiency

A

AR>ATC, money left over to invest

need supernormal profit to invest in research and development

how changing technology improves a firm’s output potential over time

e.g. how phones went from brick to small

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18
Q

which efficiencies are monopolies?

A

productively efficient

allocatively inefficient

possibly dynamically inefficient

X-inefficient

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19
Q

natural monopoly

A

when it’s naturally most efficient if only one firm is in the market

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20
Q

example of natural monopoly

A

london transport network

would be very inefficient if London had multiple transport network, it’s most efficient to just have one (like TFL)

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21
Q

why do the government support and own monopolies if they are inefficient?

A

natural monopoly argument

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22
Q

natural monopoly argument

A

there are high sunk costs

huge internal economies

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23
Q

estimated sunk costs of London’s transport system

A

estimated at £129bn

another firm to enter market would have to pay high costs

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24
Q

how could TFL use internal economies of scale?

A

could use technical economies of scale like oyster card and self service ticket machines to reduce amount of workers needed

purchasing economies to buy fuel in bulk and transport trains and buses at lower costs

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25
minimum efficient scale
where LRAC is at its lowest
26
constant marginal cost simplification
MC initially decreases because as output increases and more workers are hired, they can specialise, increasing productivity and decreasing marginal cost but MC will then increase because diminshing marginal returns will decrease productivity, increasing MC when MC is constant, MC will be a straight line and MC=AC economists can assume MC is constant
27
price discrimination
when a firm charges different prices for different consumers for the same good
28
example of price discrimination
e.g. student discounts in education, poorer elastic students can get scholarships
29
which consumers are likely to be charged higher prices and why?
consumers with higher income as they are less responsive to a change in price
30
which consumers are likely to be charged a lower price and why?
lower income consumers as they are more responsive to a change in price (elastic)
31
3 conditions of price discrimination (monopolies)
market power information limit reselling
32
why do monopolies need market power?
so that the firm has enough market share to change prices without losing all consumers
33
why do monopolies need information?
they need to know which consumers are elastic and inelastic
34
why do monopolies need to limit reselling?
it can ruin price discrimination the firm will lose out on profit as the consumer doesn't pay the higher price like they are supposed to
35
real life example of why monopolies need to limit reselling
students can buy student priced tickets and resell them to an adult for a price cheaper than the adult ticket can be countered with making carrying student IDs compulsory
36
what does price discriminating increase?
firm's profits
37
characteristics of a market
number of firms concentration ratio barriers to entry info available product differentiation pricing
38
what is a firm's most rational decision?
profit maximisation MC>MR
39
perfect competition
opposite of a monopoly market structure with many buyers and sellers no barriers to entry or exit homogenous goods perfect information
40
market
where consumers and producers buy and sell, market is huge Q=millions
41
firm
represents 1 of just many producers Q=10s
42
what does the demand curve of s perfectly competitive market look like and why?
perfectly straight horizontal line putting price up by just a bit means firm will lose all consumersha
43
what are perfectly competitive firms?
price takers
44
perfectly competitive firms in the short run
losses firms will leave as there are no barriers to exit prices go back up profit covers opportunity cost
45
perfectly competitive firms in the long run
can only make normal profit supernormal profits incentivise other firms to join the market supply continues to increase long run equilibrium reached as firms can no longer make supernormal profit
46
key features of oligopolies
a few large sellers high barriers differentiated goods interdependence
47
price war
when firms repeatedly reduce their prices below that of their competitors with the aim of offering the lowest price in the market benefits consumer as leads to a lower price bad for profits
48
collusion
when 2 or more firms agree to limit competition
49
overt collusion
a formal agreement between firms
50
tacit collusion
an unspoken agreement between firms
51
non collusive oligopoly
where firms in an oligopoly industry compete on prices in order to undercut the other firm and gain market share
52
collusive oligopoly
where firms in an oligopoly industry set the same prices either through tacit or overt collusion
53
whistleblowing
can lead to immunity and protection from fines
54
price agreement
occurs as a result of overt collusion
55
price leadership
when one firm changes their prices and other firms follow tacit collusion is the result of price leadership
56
cooperation
when firms work together for mutual benefit legal
57
3 methods of price competition in oligopolies
price wars predatory pricing limit pricing
58
price competition
when firms compete by changing prices
59
non price competition
firms compete without changing prices
60
price wars
when firms try to undercut each other with lower prices to steal the other firms’ consumers can be dangerous and lead to very low prices
61
predatory pricing
price dropped before short run shutdown point (AVC=AR) competitors can’t compete firms go bust and have to leave market leads to losses in short run but in long run helps to get rid of competition so can increase price and take over market
62
limit pricing
incumbent firm sets price low enough to limit new firms from entering market uses its economies of scale barrier to entry
63
non price competition
firms compete without changing price
64
advertising
can criticise other firms with adverts
65
loyalty cards
can get money off encourages customers to spend more and come back
66
branding
lures customers towards their brand
67
quality
can invest into r&d and increase dynamic efficiency and develop higher quality products to increase quality firms need supernormal profits AR>AC
68
uncertainty
when oligopolistic firms make decisions they have to deal with uncertainty this is because decisions by one firm in the industry impact all the other firms hard to predict decisions

microeconomics (8 decks)

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