MARKET FAILURE Flashcards
(45 cards)
What is the main characteristic of monopolistic competition?
Imperfect competition where firms are short-run profit maximizers
Monopolistic competition features non-homogenous products and a large number of independent buyers and sellers.
Define non-homogenous products.
Products that differentiate from each other
Non-homogeneity leads to product differentiation in monopolistically competitive markets.
What does supernormal profit mean?
When a firm’s total sales revenue exceeds the total costs of production
This occurs in the short run for firms in monopolistic competition.
What is the relationship between marginal cost and marginal revenue in the short run?
Firms profit maximize at marginal cost = marginal revenue
This is a key condition for profit maximization in monopolistic competition.
What happens to firms in the long run in monopolistic competition?
Only normal profits can be made due to new firms entering the market
The entry of new firms makes the demand for existing firms’ products more price elastic.
List the advantages of monopolistically competitive markets.
- Firms are allocatively efficient in the LR and SR
- Wide variety of choice for consumers
- More realistic model than perfect competition
- Supernormal profits can increase dynamic efficiency through investment
These advantages contribute to a more diverse market for consumers.
What is a disadvantage of monopolistically competitive markets?
Firms aren’t as efficient as perfectly competitive markets due to x-inefficiency
This inefficiency arises from the lack of strong incentives to minimize costs.
What are the characteristics of an oligopoly?
- High barriers to entry and exit
- High concentration ratio
- Interdependence of firms
- Product differentiation
Oligopolies often lead to less competitive markets.
What does a concentration ratio indicate?
The combined market share of the top few firms in a market
It is used to measure the degree of market concentration.
What is collusive behavior in an oligopoly?
When firms agree to work together to set prices or control output
This can lead to higher prices and reduced consumer surplus.
What is the difference between overt and tacit collusion?
- Overt collusion: Formal agreements between firms
- Tacit collusion: Implied collusion without formal agreement
Overt collusion is illegal in many jurisdictions.
What is price leadership?
When one firm changes its prices and others follow
This often occurs in oligopolistic markets with a dominant firm.
Define the kinked demand curve.
A model illustrating price stability in an oligopoly due to asymmetric reactions to price changes
It shows how firms face different elasticities depending on price changes.
What is a cartel?
A group of firms that agree to control prices or limit output
An example is OPEC, which controls oil output.
What are the advantages of oligopoly?
- Potential for significant supernormal profits
- Increased investment in research and development
- Collaboration can improve industry standards
- Exploitation of economies of scale
These advantages can lead to innovation and efficiency.
List the disadvantages of oligopoly.
- Higher prices and profits may lead to resource misallocation
- Collusion can reduce consumer welfare
- Reinforces monopoly power and reduces competition
These disadvantages can harm consumers and the overall market.
What is price discrimination?
Charging different prices to different consumer groups for the same good or service
This is used by monopolists to maximize profits based on varying demand elasticities.
What are the three types of price discrimination?
- First degree: Each consumer charged a different price
- Second degree: Prices vary according to volume purchased
- Third degree: Different groups charged different prices
Examples include lawyers charging different clients and peak pricing for trains.
What are the benefits of price discrimination for producers?
- Better use of spare capacity
- Higher supernormal profits
- Ability to cross-subsidize loss-making markets
These benefits can stimulate further investment and prevent job losses.
What does the process of creative destruction involve?
New firms entering the market and innovating to overcome barriers
This process is linked to technological change and competition.
How are consumers exploited under monopoly power?
Charged higher prices due to limited choices, leading to a fall in consumer surplus.
What is the process of creative destruction?
New firms enter the market to innovate and overcome barriers, leading to competition and market changes.
Who is associated with the concept of creative destruction?
Schumpeter.
