Micro 4.Market Structures Flashcards
(19 cards)
What is the most common firm objective?
Profit maximization
(Long run profit) maximization?
In order to increase Long run profits
Firms will likely increase investment spending on capital
HOWEVER this will decrease SR profit and raise SR costs
(Short run profit) maximization?
In order for short run profits to increase
Firms will attempt to decrease SR costs
HOWEVER
Firms will likely lower investment spending on capital to do this
What are the 5 different market structures?
Monopoly
Perfectly competitive Market
Monopolistic competitive market
Oligopoly
Monopsony
What effects the type of structure a market assumes?
Number of buyers and sellers
No. of Barriers to entry/exit
Similarity of Product with competitors
Amount of knowledge of the product held by both parties
What is the N-Firm concentration ratio?
The % share of the market owned by N-amount of its largest firms
What’s a perfectly competitive market?
A market with many small buyers and sellers, no barriers to entry/exit, homogeneous goods, and perfect information.
The firm diagram features Cost and Q on axes with:
A perfectly elastic demand curve, set a the market equilibrium price
What are perfectly competitive firms referred to as?
Price takers
What is a pure monopoly?
A firm with 100% market-share/ monopoly power within a market
What is a legal monopoly?
When a firm has a market share > 25%
What’s monopoly power?
The power a firm has to set their own prices, without greatly losing customers
The higher a firm’s market share the higher it’s monopoly power
What’s the monopoly power of perfectly competitive firms?
ZERO, they are the only firms without any market power.
What factors effect monopoly power?
No. of competitors- More firms = less price setting power
Barriers to entry- Less barriers to entry = more new firms = less market share
Product differentiation- A special product = recurring consumers + brand loyalty = more monopoly power
Technology- More take means it’s easier to find cheaper firms= less monopoly power
Benefits of a monopoly?
More profit to invest in new innovations
Monopolies can produce more at a lower cost, due to internal economies of scale
Cons of a monopoly?
Lower market quantity (higher prices and fewer goods)
Consumer choices / alternatives are restricted
What does a monopoly diagram look like?
A regular supply / demand diagram, with a price set above the equilibrium and hence a quantity lower than the equilibrium
What are the two ways in which firms compete?
Price Competition and Non-Price Competition
What are the 4 types of price competition and how do firms use them?
Undercutting- Firms drop prices, to steal customers at the risk of losing profit
Predatory Pricing- Firms aggressively cut prices to eliminate competition, at the risk of losing SR profit
Limit Pricing- Firms use economies of scale to decrease LRAC and Prices, preventing new firm entry
Special offers- Firms attract new customers away from competitors
What are the 4 types of NON-price competition and how do firms use them?
Advertising- Large firms use adverts to steal consumers and create brand loyalty (and inelastic demand)
Loyalty cards- Create brand loyalty and repeat consumption
Product differentiation- Special products draw consumers away from competition
Quality- investment into research and dev, produces more new innovations = higher quality products + more monopoly power
