Competition and Markets Flashcards
(42 cards)
What are the different degrees of competition by which we classify markets?
Number of firms
Conditions of entry/exit to industry
Nature of Product
Information available to buyers and sellers
How does the number of firms affect competition?
More firms in a market, greater amount of competition
How do the conditions of entry/exit to industry affect competition?
○ E.g. easy market to get into, more likely to have a high no. of firms, more competition
More barriers to entry, difficult for firms to set up, low no. of firms
Firms may have a patent, so other firms find it difficult to enter
Ease of exit depends on ease of entry
How does the nature of Product affect competition?
○ Unique product; similar yet different characteristics; homogenous products
○ More differentiated/unique product is, less competition you’re likely to have
How does the information available to buyers and sellers affect competition?
○ Perfect, imperfect or asymmetric information.
○ More info there is, better the info, greater the degree of competition
Easier for firms to set up and enter market
Types of Market
Perfect Competition (most competitive)
Monopolistic Competition
Oligopoly
Monopoly (Least competitive)
Characteristics of a Perfect Market
No. of firms
-infinitely many
Freedom of entry
-unrestricted
Nature of product
- homogenous (undifferentiated)
Examples
-cabbages, carrots (approx.)
Implication for demand curve
- horizontal
- firm is a price taker
Characteristics of a Monopolistic Market
No. of firms
-many/several
Freedom of entry
-unrestricted
Nature of product
-differentiated
Examples
-hairdressers, restaurants
Implications for demand curve
- downward sloping
- relatively elastic
n.b.some control over price- most common
Characteristics of a Oligopoly Market
No. of firms
-small number of large firms
Freedom of entry
-restricted
Nature of product
-undifferentiated or differentiated
Examples
-petrol, banking, supermarkets
Implications for demand curve
- downward sloping
- relatively inelastic (shape depends on the reaction of rivals)
n.b. interdependence
Characteristics of a Monopoly Market
No. of firms
-one
Freedom of entry
-restricted or completely blocked
Nature of product
-unique
Examples
-local water company, train operators (over particular routes)
Implication for demand curve
- downward sloping
- more inelastic than oligopoly
- firm has considerable control over price
n. b. freedom of entry restricted
- 25% of market share, or more
What is Accounting profit?
• Accounting Profit = Revenues - Costs
○ Costs: rent for land and capital and wages for labour
○ Revenue = Costs - breaking even
What is economic profit?
• Economic Profit: Revenues – Costs
○ BUT: Costs also include opportunity cost
○ Revenue = Costs - making a normal level of profit
define normal profits
minimum profit necessary to attract and retain a company.
Accounting: breaking even
define supernormal profits
financial returns greater than normal profits.
§ Accounting: profits
define fixed costs
costs that do not vary with output
define variable costs
costs that change with the level of output
define total costs
total cost of producing some output, Q
TC = FC + VC
define average cost
cost per unit of output
AC = TC/Q
define marginal cost
cost of producing one additional unit
MC = change in TC / Change in Q
Characteristics of perfectly competitive firms
-individual demand is perfectly elastic
- firm is a price taker, no control over market price
• Marginal revenue line is also perfectly elastic
○ Equal to average revenue & demand curve
• Maximize profit when marginal cost equals marginal revenue
○ MR = MC
§ This is the profit maximising point for all firms
if short-run supernormal profits occur, what happens in the long-run?
○ Profits are known to potential entrants
○ Supernormal profits attract firms
○ Entry eliminates supernormal profits
In long-run equilibrium, what happens when profit increases?
○ Increased profits attract new businesses into the market.
○ The market equilibrium price drops until AR = AC and only normal profits are earned.
What is productive efficiency?
occurs when the firm is operating at the minimum point on its long-run average cost curve
i.e. producing at most cost efficient level, at min LRAC
Are perfectly competitive firms productively efficient?
○ In the short run? No
○ In the long run? They are
goods are being produced and sold at the lowest possible average cost.
