Market Types Flashcards
(63 cards)
1
Q
what are the conditions of Perfect Competition?
A
- Many sellers (small)
- Many buyers
- Identical (homogenous) products
- No barriers to entry / exit of firms
- Perfect information in the market (knowledge)
- Price taker - The seller has no degree of control over price - take price from the market
Best outcome in terms of efficiency
2
Q
what are the conditions of a Duopoly?
A
- Two sellers (Air NZ & Jetstar)
- Strong barriers to entry of other firms
- See a lot of non-price competition
- Firms have a relatively strong degree of control over price
○ Tend to avoid price wars
3
Q
what are the conditions of a Monopoly?
A
- Single seller
- Firm is a price setter (they choose the point on the demand curve to operate at - market determines the quantity)
- Strong barriers to exit / entry
4
Q
What is a pure monopoly?
A
Monopoly with no close substitutes
4
Q
What is a near monopoly?
A
monopoly with no direct competitor, but has substitutes
5
Q
What are the strong barriers to entry for a monopoly?
A
1) firm has single ownership of a resource
2) legal barriers (such as a patent)
3) Economies of scale
6
Q
what are the conditions of a oligopoly?
A
- A few large sellers
- Characteristics are essentially the same as duopoly, apart from the number of firms
○ E.g. oil companies / service stations
- Characteristics are essentially the same as duopoly, apart from the number of firms
7
Q
what are the conditions of monopolistic competition?
A
- Many sellers
- A differentiated product (non-price competition)
- Weak barriers to entry of other firms
○ Weak degree of control over the price (fairly competitive)
○ Most common market structure
E.g. Dairies, fish and chip shops, hairdressers, etc
8
Q
What happens as we go from more efficient to less efficient?
A
- fewer firms
- larger DWL
- Higher prices
- Smaller market quantity
9
Q
Total revenue calculation
A
price x quantity
10
Q
Average revenue calculation
A
total revenue/quantity
11
Q
Marginal revenue calculation
A
Δ Total revenue/ Δ quantity
12
Q
What is price equal to for Perfect comp
A
P = MR = AR = D
(Price is constant at the market equilibrium)
The firm takes the price from the market, and can sell as much quantity as they want at P because of the many buyers assumption
13
Q
Where is the profit maximisation point?
A
where marginal revenue = marginal cost
14
Q
Average cost calculation
A
total cost/quantity
15
Q
What happens when the firm operates at a Q < (MC = MR)
A
- MC is < MR, total cost is less than total revenue
- It is profitable to produce an extra unit
- As long as MC < MR, the firm will increase output
(Missing out on marginal profits)
16
Q
What happens when the firm operates at a Q > (MC = MR)
A
- MC is > MR, total cost is increased by more than total revenue
- It is not profitable to produce an extra unit
The firm will decrease output
- It is not profitable to produce an extra unit
(making marginal losses)
17
Q
What do the average curves tell us?
A
how much profit is being made
18
Q
What is a fair return?
A
zero economic profit - AC=AR
opportunity cost = accounting profit
19
Q
What is a less than fair return?
A
accounting profit < opportunity cost
20
Q
What is a more than fair return?
A
accounting profit > opportunity cost
21
Q
What profit can a perfect competitor make in the short run?
A
any kind of profit
22
Q
What profit can a perfect competitor make in the long run?
A
market returns to the equilibrium = firms return to normal/zero economic profit
firms making negative economic profit exit
positive economic profit incentivises more firms to enter
23
Q
what is the marginal firm? (perfect comp)
A
the firm that makes zero economic profit in the long term, if price fell they would be the first to exit
24
What are fixed costs?
must be paid whether or not producing
25
what happens to average fixed costs at larger quantities?
Average fixed cost is smaller due to 'spreading the overhead'
26
Where is the breakeven point (perfect comp)?
where AC=AR = zero economic profit
27
what happens in the long run if P drops to P1 (intersects with AVC) (perfect comp)
the firm is paying all their variable costs, the firm is paying none of their fixed costs
The firm is indifferent between staying and going at P1
This is also the firms shutdown point
- If they stay, then their revenue = variable costs, and they owe fixed costs
- If they close, then revenue disappears, and variable costs disappear, but still owe fixed costs
28
what happens in the long run if P drops to below P1 (perfect comp)
they will exit the industry immediately
- fixed costs are not covered & not all variable costs are covered - will just pay their fixed costs
29
what happens in the long run if P drops to between P and P1 (perfect comp)
the variable costs are covered, and some of the fixed costs are covered, the firm will stay
(if they leave they pay all their fixed costs, at least some are covered)
30
What is the short run supply curve equal to?
Marginal cost curve above the shutdown point
(because fixed costs are irrelevant to the supply decision in the short run)
31
What happens to costs in the long run?
They are all variable costs
- There are no AFC (average fixed costs)
AVC = AC (same curve)
32
What happens to a firms breakeven point in the long run?
it is also their shutdown point
- Hence firms will exit if profit is below zero economic profit
33
What will the monopolist need to do if they want to increase quantity?
If the firm wishes to increase quantity, they still need to lower their price like any other firm
34
What is economies of scale?
a. Falling average cost over the market output (usually when a network is involved with a high set up cost)
b. leads to natural monopolies - best to have 1 network, and one firm producing at a lower average cost than 2 firms
35
Can total revenue fall as quantity increases?
yes Total revenue can actually fall as quantity increases
36
How much does total revenue increase for the first unit sold? (monopoly)
For the first unit sold TR increases by the $ amount that the first unit is sold for MR=P
37
what does the demand curve tell us (monopoly)
it tells us the price
A monopoly's AR curve is the market demand curve
38
What is the curvy bit of the MC curve?
below the shutdown point
39
What types of profit can a monopoly make in the short term?
all kinds of profit
40
What kinds of profit does a perfect competitor make in the long run
- Making a negative economic profit = exits the market
- For positive economic profit, firms enter, price falls, and the marginal firm returns to zero economic profit
-Makes zero economic profit
41
What kinds of profit does a monopoly make in the long-run?
- Making a negative economic profit, they exit the market
- Barriers to entry of other firms means a monopoly can maintain a positive economic profit in the long-run
-Either zero or positive economic profit
42
Why does a monopoly deliberately restrict quantity/supply?
So they can charge a higher price / get higher profits
43
What does a monopoly market result in that perfect competition doesn't?
A dead weight loss
44
What happens as a result of having a monopoly rather than a competitive market?
- Quantity is lower
- Price is higher
- Consumer surplus is lower
- Producer surplus is higher (sometimes called monopoly profits)
45
what does the Commerce Commission consider anti-competitive behaviour?
- Use of a dominant position to exclude competitors
- Price fixing
-Taking advantage of market power
46
Control of monopolies or firms with substantial market power usually takes on which 3 main forms?
1) Regulating their behaviour, with penalties for infringing (commerce commission model)
2) Control price, output or profit through regulation e.g. Maximum price
3)Government ownership
47
Why is it important to ensure the price signal and profit motive remain clear when price controlling? (regulation)
It is difficult to get right. Often the control itself imposes a greater level of market failure than the original situation
48
What is a Duopoly?
A special case of an oligopoly
49
Why can Duopolys not make price agreements?
It is illegal and the commerce commission may fine them for it
50
What is a monopolistic competition categorised by:
- Many sellers
- Differentiated product (not identical)
- Free entry and exit (no barriers)
- Demand and revenue curves are downward sloping (not horizontally like perfect comp)
No longer have the many buyers assumption of perfect competition
51
What happens to a positive economic profit for monopolistic competition in the short run?
Short run positive economic profits will disappear in the long run due to other firms entering
52
What happens to a negative economic profit for monopolistic competition in the short run?
Short run negative economic profits will disappear in the long run as firms exit
53
What is the long run outcome for monopolistic competition?
The long run outcome will be zero economic profit for the marginal firm
54
What does it mean for monopolistic competition that: Q = P (from demand curve) > MC
Consumers are willing to pay a high enough price to cover the marginal cost of producing another unit
55
What is the monopolistic competitors long-run graph the same as?
Same diagram as a for a monopoly making zero economic profit
56
How is a monopolistic competitor making zero economic profit NOT allocatively efficient?
Smaller quantity and higher price than under perfect competition
There is a deadweight loss
57
How do monopolistic competitors try to gain more market share?
Monopolistic competitors have the incentive to try and push the demand curve out to the right, and gain more market share.
58
What is the difference between a monopoly and monopolistic competition?
Unlike a monopoly, monopolistic competitors have a lot of competition
59
What is the cycle for a monopolistic market?
1. Increase demand to increase profit = positive economic profit
2. Other firms enter
3. That pushes the demand curve back to the left = zero economic profit
4. Back to 1
60
Why do we tend to see a lot of non-price competition in monopolistic competition?
they are trying to push the demand curve out
(perfect competitor can't do this, as they have identical/homogenous products)
Examples - Advertising, location, service, competitions, sponsorship etc, minor product variations
61
Which market structures can utilise product differentiation and why?
Monopolists, oligopolies, duopolies and monopolistic competitors can all use product differentiation to push their demand curve out
Monopoly: make the market bigger
Oligopoly /Duopoly: increase market share without starting a price war
Monopolistic competitor: trying to stand out amongst a crowded market
Perfect competitor: does not have this opportunity (identical products)
62
Why does AR/MR shift up and down when Market price shifts for perfect competition?
Because the firm is a price-taker and has no influence over price
