3.4 Competitive and Concentrated Markets Flashcards
(43 cards)
4 types of market structures
perfect competition
monopoly
oligopoly
monopolistic competition
what does a monopoly mean
One seller dominating the market
25% or more of market share = monopoly power
what should the conditions of a monopolistic market be
- High barriers to entry and exit
- Differentiated products (no close substitute)
- Imperfect information
- Firms are price makers
- Firms is a profit maximiser
- (MR = MC)
what does allocative efficiency mean
Allocative efficiency = resources are being allocated are at a good efficiently
( consumers aren’t being exploited and prices are at a good level)
price = mc
productive efficiency means
Quantity is at lowest point on AC curve (producing at lowest cost)
dynamic efficiency
When firms have enough money to invest in tech and capital
what does perfect competition mean
- a large number of small firms
characteristics of perfect competition
No barriers to entry/exit
Perfect information
Homogenous- (the same) goods being sold
Many buyers and sellers (infinite)
Firms are price takers
what is monopolistic competition
a large number of firms within a market
characteristics of monopolistic competition
Many buyers and sellers
Slightly differentiated goods
Non-price competition (advertising. specialisation)
Good information
Low barriers to entry and exit
Firms are price makers
Price elastic demand (substitutes)
Firms are profit maximisers (MR = MC)
what is an oligopoly
small number of large firms in an industry
characteristics of an oligopoly
- high barriers of entry and exit
- Product differentiation (branding)
- interdependence of firms (actions of one firm will affect another firms behaviour)
- high concentration ratio
- Firms are price makers
-non price competition - profit maximisation is not the sole objective
example of a monopoly
example of perfect competition
farmers markets
example of monopolistic competition
hairdressers and barbers
examples of oligopoly
supermarkets and airlines
examples of barriers to entry
Capital costs
2. Sunk costs
3. Scale economies
4. A natural monopoly
5. Natural cost advantages
6. Legal barriers
7. Marketing barriers
8. Restrictive practices
9. Innocent entry barriers
10. Product homogeneity
11. knowledge
objective of firms=
profit maximisation
why is profit maximisation an objective
- re investment
- dividends for share holders , share holders are owners of a company, without their finance = no company
- lower cost profit = TR-TC business may keep costs very low = greater profit. and pass lower costs to consumers
- reward enterpanuriship
when does profit maximisation occur
mc= mr
why is profit maximisation not an objective
-avoid scrutiny
-key stakeholders could be hardened
other objectives of firms (not profit maximisation)
-profit satisficing- sacrificing profit to satisfy stakeholders
-revenue maximisation = occurs when MR= 0
may want to do so increase eos (revenue larger then profit), predatory pricing (undercut competitors and drive them out)
-sales maximisation (eos), limit pricing (business wants to get bigger without losing cost) ac= ar this limits competition
-flood market to develop loyalty and gain consumers
-survival (short run when they enter a hyper competitive market) spread brand awareness
what does the price in a perfect competition market depend on
In such markets the price is determined by the interaction of demand and supply.
Why profits are likely to be lower in a competitive market than in a market which is dominated by a few large firms.
In a competitive market, profits are likely to be lower than a market with only a few large firms. This is because each firm in a competitive market has a very small market share. Therefore, their market power is very small.
