Flashcards in Micro Markets Deck (26):
Characteristics of perfectly competitive market
1 large number of buyers and sellers
2 individual buyers small in comparison to market
3 each individual takes market price as given
4 perfect information / equal access
5 products sold are identical
6 entry / exit is free (because all firms break even in LR)
Normal rate of return is when
Firms are breaking even (in economics)
For a perfectly competitive firm, price is equal to
Profit maximising quantity is --- in a perfectly competitive market because ...
MR=MC. Or P=MC, because P=MR as price is constant thus so is MR.
Total cost in a perfectly competitive market is at
AC x Q, total revenue is PxQ, and the difference is PROFIT
Breakeven point in a perfectly competitive market is
P = min average cost. As TR = TC, firms make no economic profit and break even.
FIrms in a perfectly competitive eventually breakeven in the long run because
new firms enter causing S to shift out and lower the price. This will continue until the price drops too low for some firms, causing firms to leave and the S to shift left again. This causes price to rise again and firms will break even in the long run.
A firm making a loss will continue to operate if
Minimum AVC is below price. This means they can cover variable costs (as TC = VC + FC). They will produce as long as the loss is less than the total fixed costs
A firm making a loss will shut down if
Price falls below minimum AVC. At this price, AVC is not covered. The shut down point is P = min AVC.
A firms short run supply curve in a perfectly competitive market is
MC curve above AVC.
If MC is lower than ATC in a perfectly competitive market
ATC is rising.
If MC is higher than ATC in a perfectly competitive market,
ATC is falling
If MC is equal to ATC,
ATC is at its minimum.
Features of a monopolistic market
1. Single seller who has market power and can change their price without loosing too many customers.
2. No close substitutes.
3. Significant barriers to entry such as patents, government franchises, economies of scale, ownership of a scarce factor of production
In a natural monopoly, when TR is at maximum, MR is equal to ...
0 (think of the graph). This is useful for profit maximization
In a natural monopoly, the midpoint of the Demand curve is where
MR intersects the X axis. Above the Midpoint, demand is elastic, and below demand is inelastic.
Profit maximizing point in a perfect monopoly is
MR = MC, we want to maximize the difference between TR and TC. A profit maximizing monopolist will increase production so long as marginal revenue exceeds the marginal cost of the extra unit.
A supply curve for a monopolist
would be vertical because they will only ever produce at profit maximizing output, and this is at MC = MR.
Price discrimination is when
Monopolists try to minimise consumer surplus, and charge higher prices to those who are willing to pay. 2 conditions apply: 1. different customers must exist. 2. must be able to identify different customers, 3. arbitrage prevention
Features of a monopolistic competitive market
1. Large number of firms
2. no barriers to entry
3. Product differentiation
4. firms can enter and exit with ease
Product differentiation reduces elasticity of demand because
it changes the availability of substitutes.
In the long run, monopolistic firms will break even. This is because
As existing industry firms are making profits, other firms will be attracted. Demand will shift left, causing a reduction in market share for existing firms. Eventually ATC is equal to demand curve.
In the long run equilibrium, price in a monopolistically competitive market is
above marginal cost, unlike in a perfectly competitive market.
Features of an oligopolistic market
1. Few dominant firms (2-3)
2. Products can be identical or differentiated
3. Behaviour of one firm affects how other firms react.
In a homogenous oligopoly, price is important because
everything is similar