Imperfect Competition, Flashcards
(19 cards)
What is monopolistic competition?
Monopolistic competition occurs where there are many buyers and many sellers, and sellers can differentiate their products. This puts a downward slope on each firm’s demand curve.
What is the difference between profits earned in the short run and in the long run under monopolistic competition?
Profits may be earned in the short run, but these are competed away by entry so that in the long run equilibrium supernormal profits are zero.
The equilibrium in monopolistic competition involves what in comparison to perfect competition?
Lower output and higher price .
What does Oligopoly refer to?
A market with many buyers and few sellers.
What is an extreme case of perfect competition?
Where no firm has any influence on the market .
What is an extreme case of monopoly?
Where there is only one firm.
What is oligopoly characterised by?
Strategic interaction.
The discontinuity in the demand curve in models of oligopoly leads to…?
A discontinuity also in the MR curve
The MC can move around a lot without…?
Causing a change in the profit maximising level of output
What does this movement suggest?
Under oligopoly, output and prices are stable.
What is Cournot oligopoly/competition?
an economic model used to describe an industry structure in which companies compete on the amount of output they will produce, which they decide on independently of each other and at the same time.
What does each firm do to yield a residual demand curve ? And what do they evaluate from this?
Horizontally subtracts the other firms output from the market demand curve. From this, it evaluates it’s MR and profit maximising output.
What does each firm derive and what does it show?
Each firm derives its reaction function, showing how much it will produce at each possible level of output for its rival.
Iteration continues until firms reach a…?
Cournot equilibrium
At the Cournot equilibrium each firm is setting MC equal to…
(residual) MR
Therefore is producing to…?
The left of the point which AC reaches a minimum.
Compared to a perfectly competitive industry, is provided industry output above or below?
Industry output is below what a perfectly competitive industry would provide.
Is there allocative efficiency?
Yes.
Is supernormal profit earned?
Yes but not as much as they could earn if they were to collude. (Thus effectively becoming a monopoly)
