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ECO2101 Microeconomics > ECO2101 Perfect Competition and Monopoly (3) > Flashcards

ECO2101 Perfect Competition and Monopoly (3) Flashcards

(65 cards)

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1
Q

What is one of the major influences on MR?

A

The degree of competitiveness in the market
Actual and potential competitors

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2
Q

What is the definition of perfect competition?

A

PC market is where both buyers and sellers believe that their own buying/selling price has no effect on market price

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3
Q

What are some characteristics of perfect competition?

A

Large number of buyers/sellers
Homogenous product (identical)
Free entry and exit (long run)
Perfect knowledge

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4
Q

Draw a graph showing perfectly elastic demand for a firm

A

check ppt (34)

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5
Q

Why would a firm in perfect comp not change price?

A

If they increase price consumers buy from competitors
No point decreasing price as they can sell as much as they want at the set price

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6
Q

What is a firms demand curve?

A

A firms demand curve is also its AR and MR curve

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7
Q

What is the equation for MR?

A

MR = change(TR)/change(q)

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8
Q

In perfect competition what is a firms AR/MR?

A

AR=MR=p
since demand is perfectly elastic

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9
Q

How do firms maximise profit in the SR?

A

SMR=SMC

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10
Q

Show profit (π) max and min for a firm in perfect competition on a graph

A

check ppt (34)

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11
Q

What is the short run profit maximising rule?

A

MR=SMC
SMC is rising

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12
Q

Construct a graph of a firm in perfect competition where the loss is the same as TFC

A

check ppt (35)

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13
Q

Where is the short run shutdown price?

A

Where the loss is equal to TFC (the gap between SAVC and SAC)

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14
Q

Where is the long-run shutdown point in perfect competition?

A

When MR is equal too or less than LAC

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15
Q

What are the supply curves for short-run and long-run?

A

Short tun - supply curve is the part of SMC above minimum AVC
Long-run - supply curve is the part of LMC above minimum LAC

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16
Q

Why is short-run supply steeper than long-run supply?

A

Because it will always be less costly for firms to increase output when it can change all inputs

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17
Q

What is the equation for profit?

A

π(q) = pq-TC(q)
or
π(q)=TR(q)-TC(q)

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18
Q

Create an equation for MR from TR

A

Check ppt (36)

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19
Q

What is the equation for elasticity (E)?

A

E= -(change(q)/change(p))(p/q)

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19
Q

How can we represent MR in terms of Elasticity?

A

MR =p(1-1/E)

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20
Q

How can we get an equation for MC in equilibrium?

A

Since MR=MC then:
MC=p(1-1/E)

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21
Q

How else can we express the MC equation?

A

(p-MC)/p=1/E

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22
Q

What is E under perfect competition?

A

E is infinitely large

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23
Q

What is the short-run industry supply curve?

A

Industry supply is the horizontal summation of each firm’s SMC curve above minimum AVC

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24
Show the effect of an increase in demand for a good using an industry supply graph also show the effect on the firm
check ppt (37)
25
What is the LR supply price?
supply price in the long run is equal to minimum LAC of the firms
26
What are the 2 situations that make the LR supply curve upwards sloping?
Factor prices increase with usage Heterogenous firms
27
Draw a graph showing the effect of increased demand where factor prices increase with usage. In perfect competition SR
Check ppt (37)
28
Draw a graph showing an increase in demand in the long-run, where factor prices increase with usage. Perfect competition
Check ppt (38)
29
What are heterogenous firms +example?
Firms with differences in efficiency e.g Firms that entered the industry earlier will have lower cost curves
30
Construct graphs of a marginal firm and intra-marginal firm (heterogenous- more efficient) showing how they receive different profits from the industry
Check ppt (38)
31
Draw D, AR and MR curves for monopoly
check ppt (39)
32
What is a monopoly that always has IRS (increasing returns to scale) called?
Natural Monopoly
33
What is the overall trend for monopolists returns to both factors and scale?
Increasing then decreasing
34
Draw a diagram showing a monopolist in equilibrium
check ppt (39)
35
What is allocative efficiency and productive efficiency?
Allocative Efficiency (AE): p=MC Productive Efficiency (PE): IRS are exhausted so LAC is minimised
36
What does allocative efficiency require?
marginal social benefit (MSB) to be equal to marginal social cost (MSC)
37
What are the equations for MSC and MSB?
MSC=MPC+MEC MSB+MPB+MEB MEC- marginal external cost MEB - marginal external benefit
38
What are private vs external benefits?
Private - benefits (costs) are those incurred by agent producing or consuming External - the non-price effects of production or consumption on other members of society
39
What are MPC and MPB equal too?
MPC=LMC of monopolist MPB= price consumers willing to pay for good
40
Draw a graph showing a monopolist in the long run including the privately and socially optimal points and show deadweight loss
check ppt (40)
41
What is consumer surplus CS and producer surplus PS?
CS - excess of what consumers are willing to pay PS- excess of what producers actually receive over what they are willing to recieve
42
What is the equation for social welfare SW?
SW=PS+CS
43
Draw a firms curve (monopolist and perfect comp) showing changes in CS PS and SW
check ppt (41)
44
Describe what happens when there is an "overnight" monopolisation of a PC industry
Firms of the industry become manufacturing plants for monopolist The S(lr)=∑LMC of the PC industry becomes the monopolists LMC curve
45
Why are monopolies harmful to society?
They lead to DWL (i.e. consumers lose more than producers gain)
46
What are the two scenarios related to cost over time after instantaneous monopolisation?
Liebenstein "X-inefficiency" Schumpeter "R&D"
47
Construct a graph showing both the Liebenstein and Schumpeter scenarios after monopolisation
check ppt (42)
48
What are the two basic approaches to PD (price discrimination)?
Charging different prices to different consumers for same units of the good Charging same consumers different prices for different units of the good
49
What are the three main types of PD?
First degree Second degree Third degree
50
What is first degree price discrimination?
Monopolist charges each consumer maximum price willing to pay
51
What is the DWL for first degree price discrimination and what does this show?
DWL=0 meaning it is allocatively efficient however CS = 0
52
Draw a graph showing first degree price discrimination. Show CS PS SW and DWL
check ppt (42)
53
What is second degree price discrimination?
Where monopolist knows there are different types of consumers with different willingness to pay WTP but cannot identify them individually
54
What is the consumer surplus equation in second degree price discrimination?
CSi(x)=ui(x)-P(x) for consumers i = H,L where consumer H gets more utility of good at quantity x then consumer L uh(x)>ul(x) Difference between utility at said quantity and price paid
54
Draw a second degree price discrimination diagram showing what the monopolist would like to extract
check ppt (43)
55
In second degree price discrimination why does H (high buyer) prefer package (PL,XL)?
Because it makes their consumer surplus positive (B)
56
What do monopolists do to stop H from consuming XL? check ppt 43
They remove B from the package which makes them indifferent from the packages
57
What can monopolists do to further decrease consumer surplus?
Decrease package xL to xLL
58
Draw a graph showing second degree price discrimination after monopolist has decreased the price of the low package. Show the total profits before and after the decrease
check ppt (43)
59
Where does the monopolist reduce xL to?
Reduce xL until MC = MR
60
What is third degree price discrimination?
Monopolist sells good at different prices to different identifiable consumers (distinct markets)
61
Draw a graph showing third degree price discrimination
check ppt (44)
62
What do monopolists do in third degree price discrimination to maximise profits?
They charge the group with relatively inelastic demand more and relatively elastic demand less
63
Draw the diagram for a natural monopoly
check ppt (44)

ECO2101 Microeconomics (6 decks)

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