Chapter-23 Flashcards
Market structure (10 cards)
What is normal profit?
Normal profit is the minimum level of profit required to keep a firm operating in the industry in the long run.
What is supernormal profit?
Supernormal profit is any profit above the level needed to keep a firm in the market in the long run.
What is a monopoly?
A monopoly is a market structure where there is only one supplier of a product or service.
What is a barrier to entry?
A barrier to entry is any factor that makes it difficult for new firms to start producing a product.
What is a barrier to exit?
A barrier to exit is any factor that makes it difficult for a firm to stop producing a product.
What are the key characteristics of a monopoly?
i) The firm is the entire industry, holding 100% market share.
ii) There are high barriers to entry and exit, making it hard for other firms to enter or leave the market.
iii) A monopoly is a price maker because its supply determines the market price.
Why do monopolies arise?
i) A firm may outcompete rivals over time by cutting costs and meeting consumer demands, eventually driving them out and gaining full market control.
ii) Mergers and takeovers can reduce the number of firms until only one remains.
iii) Some monopolies exist from the start if a firm owns all the resources (e.g. gold mines) or is granted exclusive rights by the government.
iv) Patents can prevent other firms from producing the same product.
Why do monopolies continue to exist in the market?
i) Legal barriers like patents or government regulations protect the monopoly.
ii) Economies of scale allow monopolies to produce at lower costs than new entrants.
iii) High startup costs discourage new firms, especially when expensive equipment is needed.
iv) Brand loyalty created through advertising makes it hard for new firms to attract customers.
v) Access to key resources or retail outlets may be limited to the monopoly.
vi) Barriers to exit like long-term contracts or sunk costs (non-recoverable expenses) make it risky for new firms to enter.
What is meant by scale of production?
Scale of production refers to the size of production units and the methods of production used.
What are sunk costs?
Sunk costs are costs that cannot be recovered if the firm leaves the industry.
