Competitive Markets Flashcards
What is the perfectly competitive graph?
•axis= price and quantity •ATC U shaped •MC tick shaped •AR=MR=D=P -in line with ATC= normal profits -above ATC= supernormal profits -below ATC= loss
What efficiencies do perfectly competitive markets meet?
- allocatively= resources meet demand
- productively= AC lowest point
- ^both= statically
Cannot be dynamically (efficiency over time) as do not have funds+assumes perfect knowledge
What is horizontal integration? What are the benefits?
What are the costs?
=must be in the same stage e.g primary to primary
✔️ can control another sector of company such as raw material supply
✔️encourages internal economies of scale
✔️wider range of products
✖️reduced competition
What is vertical integration?
= mergers with a business in the same industry but another stage
- forward= closer to the final consumers of the product (primary to secondary, secondary to tertiary)
- backward= closer to raw materials in supply chain (secondary to primary, tertiary to secondary)
What is conglomerate integration?
=a takeover between completely different markets
✔️diversifies business
E.g Walt Disney + American Broadcasting company
What is the perfect competition model?
•lots of firms in an industry •no barriers to exit and entry •homogenous (exactly the same) products •elastic •perfect knowledge •perfectly mobile factors of production •1 firm/ 1 buyer effects price E.g foreign exchange markets
What is internal growth of a company?
Internal= business expands its own operations •investment in new capital+technology •development+launch of new products •exporting to emerging countries •growing customer base through marketing
What are the pros of vertical or horizontal integration?
✔️control of supply chain can reduce costs
✔️improved access to raw materials which may make it harder for firms in competition
✔️more monopoly power
Benefits of perfect competition?
- no information failure (market failure)
- no monopoly power
- no need to spend money on advertising
- max consumer surplus+economic welfare
- max productive (MC=ATC)+allocative (P=MC)
Cons of perfect competition?
- normal profits= no dynamic eff
- if there are high fixed costs, firms will not benefit from eff of scale
- many small firms producing small amounts= no scope for econ of scale
- homogenous= boring for consumer
- no Gov intervention= possible market failure if externalities exist
What happens if supernormal profits are made?
- new firms will enter industry (profit incentive) which lowers prices
- firms may then make a loss and leave the industry
- prices rise to normal again
What is external growth of a company?
=increase in a company’s sales and profits
•buying other companies
•forming a business relationship with others
•merging
•take overs
