Market structure Flashcards
(22 cards)
State and explain 6 goals of the business
- Profits maximization: Firm aims to make as much profit as possible (TR-TC, OR MR=MC)
2.Satisficing: when a firm seeks a satisfactory level of achievement, rather than maximizing profits or growth.
- Sales revenue maximization: a business strategy that focuses on generating the highest possible sales revenue
- Growth: When a business increases the size of the firm by increasing factors of production
- Survival: when a firm is focused on survival due to lack of cash, inability to compete with larger firms, and economic recession
- Market dominance: A firm aiming to be the number one firm in an industry by controlling the largest market share in the industry.
What is revenue?
This is the income a firm derived from the sale of its goods or services.
What is total revenue?
Refers to the total amount of money a firm earns from selling its goods or services.
What is average revenue?
The revenue gained per unit of good sold
What is marginal revenue?
The additional revenue generated from selling one more unit of good or service.
Explain normal profits
normal profit is the amount of profit where the firm earns exactly what it would with the resources used.
NB: there is no incentive for new firms to enter or exit the industry.
Explain subnormal profit?
Subnormal profit occurs when a firm’s total revenue is less than its total costs. It means the firm is not covering all its costs, and it’s operating at a loss.
Explain abnormal profits
The profit earned by a firm that exceeds the normal profit level. This means that the firms is making way more revenue than the amount spent for the factors of productions used.
NB: Abnormal profits can attract new competitors to the market, especially in industries with low entry barriers.
What is a market structure?
Market structure refers to the organizational characteristics and competitive behavior of a market, which influence how firms interact, set prices, and make production decisions
What are the 4 main types of market structures?
Perfect competition
monopolistic competition
oligopoly
Monopoly
Explain perfect competition
Perfect competition is a theoretical market structure. It represents an idealized form of competition, often used as a benchmark to compare real-world market structures.
List 6 characteristics of perfect competition
Many buyers and sellers
Homogeneous products
Perfect information
Free entry and exist
Price takers
Profit maximization
Explain “Many buyers and sellers”
Since there is a large amount of buyers and sellers in this market this leads to high levels of competition where individuals actions have no impact on the overall market
Explain “Homogeneous products”
There is no differentiation between products from different firms, meaning consumer view the products as the same, thus they don’t have any preference for one over the another
Explain “Perfect information”
Both buyers and sellers have complete and perfect information about prices, quality, and availability of products.
Explain “Free entry and exist”
There are no barriers to entry or exit from the market. This means that new firms can enter the market if they see a profit opportunity and firms that are not profitable can exit without any significant cost
Explain “Price takers”
Firms are price takers in perfect competition. This means that they must accept the current market price, thus they can’t increase nor decrease price.
Explain “Profit maximization”
Firms aim to maximize their profits. They do this by producing the quantity of output where MC equals to MR.
Outline 3 assumptions made about perfect competition
- Perfect Mobility of Goods: This means that producers can transport goods easily and efficiently to all parts of the market.
- No Transaction Costs: There are no costs associated with buying or selling goods.
- No Externalities: The market is isolated from external influences, such as government policies or environmental impacts.
Define industrial concentration?
The extent in which the market is dominated by one or more businesses
State 2 methods of calculating industrial concentration
The concentration ratio
The Herfindahl-Hirschman Index
Explain the difference between the concentration ratio and the Hirschman Index
Measures the combined market share of the top firms in an industry (usually CR4 or CR5). However, the Hirschman Index find firms market share percentage and squares the value to later add.
<1000= indicates competition
1000-1800= indicates moderate competition
1800>= indicates no competition
