Module 12.2- Characteristics Of Market Structures Flashcards
(35 cards)
What type of demand curve do firms in perfect competition face?
Horizontal (perfectly elastic) demand curve
This means that firms cannot influence the market price.
How does marginal revenue (MR) relate to price when a firm’s demand curve slopes downward?
MR is less than price
This is significant for profit maximization.
What is the condition for profit maximization for firms with horizontal or downward-sloping demand curves?
MR equals marginal cost (MC)
Firms maximize profits by producing the quantity where MR = MC.
What are the five factors used to analyze market structures?
- Number of firms and their relative sizes
- Degree of product differentiation
- Bargaining power of firms regarding pricing
- Barriers to entry/exit
- Degree of non-price competition
What characterizes a perfect competition market?
- Many firms produce identical products
- Very low barriers to entry
- Firms compete only on price
What is an example of a market that approximates perfect competition?
The market for wheat
In this market, overall supply and demand determine the price.
What differentiates monopolistic competition from perfect competition?
Products are not identical; firms differentiate through quality, features, and marketing
This leads to a downward-sloping demand curve.
What are key characteristics of monopolistic competition?
- Large number of independent sellers
- Differentiated products
- Low barriers to entry
*Products not identical
*Firms compete less on price, more on marketing.
In monopolistic competition, how do firms maximize economic profits?
By producing where MR equals MC and charging the price from the demand curve
Firms can earn positive economic profits in the short run.
What happens to firms in monopolistic competition in the long run?
Economic profits become zero as new firms enter the market
This shifts the demand curve down to the point where price equals average total cost.
What is the defining characteristic of an oligopoly market?
High Barrier to entry, Only a few firms are in the industry
Each firm must consider the actions of others when setting prices.
What are the models used to analyze oligopoly pricing and profits?
- Kinked demand curve model
- Cournot duopoly model
- Nash equilibrium model
- Stackelberg dominant firm model
What does the kinked demand curve model suggest about price changes?
Competitors are unlikely to match price increases but likely to match price decreases
This creates a kink in the demand curves faced by each producer, at the current market price.
What is a Nash equilibrium?
A situation where no firm can increase profits by changing its price strategy unilaterally
It reflects interdependence in oligopoly markets.
In the Cournot model, how do firms make pricing decisions?
Firms choose prices based on the previous price set by a competitor
This leads to a long-run equilibrium price that is above perfect competition but below monopoly pricing.
What is a unique feature of the Stackelberg model?
One firm (the leader) sets its price first, followed by the other firm
The leader typically charges a higher price and earns more profits.
What is collusion in the context of oligopoly?
Competitors make a joint agreement to charge a specific price or set output levels
This can lead to higher joint profits for the firms involved.
What is an example of a differentiated product in monopolistic competition?
Toothpaste
Brands are differentiated through features and marketing.
What is the nature of competition in monopolistic competition?
Firms compete on price, marketing, and product features
This leads to a downward-sloping demand curve for each firm. Competing products considered close substitutes for one another.
What is the significance of barriers to entry in oligopoly?
Barriers are typically high, preventing new firms from easily entering the market
This contributes to the small number of firms with large market shares.
What happens to average total cost (ATC) in the long run under monopolistic competition?
ATC equals price at long-run equilibrium
Firms earn zero economic profits as new entrants drive down prices.
What is collusion in the context of oligopoly?
Refers to competitors making a joint agreement to charge a given price or agree on specific levels of output.
Why are collusive agreements illegal in many countries?
They reduce competition.
Give an example of a collusive agreement.
The OPEC cartel restricts oil production to increase world prices.
