Microeconomics Topic 2 YR2 Flashcards
(18 cards)
What are the key characteristics of monopolistic competition?
- Large number of firms.
- Differentiated products.
- Low barriers to entry and exit
- Firms are price makers.
What happens in monopolistic competition in the short run?
Firms can make supernormal profits due to product differentiation and branding.
What happens in monopolistic competition in the long run?
Supernormal profits attract new entrants, leading to normal profits.
What efficiencies are achieved in monopolistic competition?
Neither productive efficiency (excess capacity) nor allocative efficiency (P > MC ) are achieved.
What are the characteristics of an oligopoly?
- Few dominant firms.
- High barriers to entry.
- Interdependence between firms.
- Non-price competition.
What is the kinked demand curve model?
Price increases lead to elastic demand, while price decreases lead to inelastic demand, discouraging price changes.
What efficiencies are achieved in an oligopoly?
Neither productive efficiency (due to economies of scale) nor allocative efficiency (P > MC) are achieved.
What are the key characteristics of a monopoly?
- Single seller dominates the market
- High barriers to entry.
- Firms are price makers.
How does a monopoly set prices and output?
A monopoly maximizes profits where MC = MR, leading to higher prices (P > MC) and lower output.
What efficiencies are achieved in a monopoly?
Neither productive efficiency nor allocative efficiency (P > MC) are achieved.
What are the advantages of a monopoly?
- Economies of scale may reduce average costs.
- Supernormal profits can fund innovation.
What are the disadvantages of a monopoly?
- High prices exploit consumers.
- X-inefficiency due to lack of competitive pressure.
What are the key characteristics of contestable markets?
- Low barriers to entry and exit.
- Hit-and-run entry.
- Threat of competition forces competitive behavior.
How do contestable markets influence firm behavior?
Firms may set prices closer to allocative efficiency (P = MC) to deter new entrants.
What are the key characteristics of perfect competition?
- Large number of buyers and sellers.
- Homogenous products.
- Perfect information.
- Freedom of entry and exit.
- Firms are price takers.
What happens to firms in perfect competition in the long run?
Freedom of entry and exit ensures that firms only earn normal profit in the long run.
What happens to firms in perfect competition in the short run?
Firms can make supernormal profits, normal profits, or losses.
What efficiencies are achieved in perfect competition?
Productive efficiency ( producing at the lowest AC ) and allocative efficiency (P = MC)
