Ch 7. Market Failure and socially undesirably outcomes III (Market Power) Flashcards
(25 cards)
Market Power
The control that a seller may have over the price of the product it sells. It is the ability of a firm to charge P>MC
Perfect Competition Characteristics (a type of market structure)
- Large number of small firms
- no control over price
- all firms sell homogenous products
- no barrier to entry
- Ex. Agriculture
Monopoly Characteristics (A type of market strucutre)
- Single/dominant large firm
- Sig. control over price
- Sell a unique product with no close substitutes
- High barriers to entry
- Ex. Electricity company
Monopolistic Competition Characteristics (One of the 4 market strucutres)
- Large number of firms
- substantial control over market price
- Product differentiation
- No barriers to entry
- Fast food industry
Oligopoly Characteristics (A type of market structure)
- Small number of large firms
- Have significant control over market price
- Firms are interdependent
- Products may be differentiated or homogenous
- High barriers to entry
- Ex. Car Industry
Imperfect Competition
Firms face some degree of competition, but also have some degree of market power
Product Differentiation
When firms in an industry tries to make its product different from those of its competitiors
Barriers to entry
Anything preventing a firm from entering the industry
revenue
The payment that firms receive when they sell their good and services
Total Revenue (TR)
the amount of money received by firms when they sell a good. TR = PxQ
Average Revenue (AR)
Revenue per unit of output sold. AR = TR/Q
Marginal Revenue
The additional revenue arising from the sale of an additional unit of output. MR = Change in TR/Change in Q
Average Cost
Costs per unit of output, of the costs of each unit of output on average. AC = TC/Q
Economies of Scale
Decreases in the avg costs of production that occur as a firm increases its output by varying all its inputs
profit maximisation
making profit as large as possible, and is achieved by MR = MC
Abnormal Profit
TR>TC
Normal Profit
TR = TC
Negative Profit
TR
Price Taker
A firm that accepts a price at which it sells its product. Refers to firms in perfect Competition
Price Maker
Any firm has the ability to influence the price of its product, arises whenever the firm faces a downward slopping demand curve
Natural monopoly
A single firm that can prodduce for the entire market at a lower AC than 2 or more smaller firms.
Price Competition
When a firm lowers its price to attract customers away from rival firms
Non-Price Competition
When firms compete with each other on the basis of methods other than price
Collusive Oligopoly
Refers to the type of oligopoly where firms agree to restrict output or fix the price, in order to limit competition.
