Perfect Competition, Imperfectly Competitive Markets and Monopolies

Question 1

Market structure

Answer 1

refers to the number and size of firms within a market for a particular good or service

Question 2

Perfect competition

Answer 2

market structure that has large number of buyers and sellers who have perfect information about the market

Question 3

imperfect competition

Answer 3

any market structure that isn’t perfect competition

Question 4

pure monopoly

Answer 4

when only one firm supplies the market, least competitive form of market

Question 5

what is the main objective of firms?

Answer 5

-profit maximisation

Question 6

why firms want large profits?

Answer 6

• reinvest funds into developing new products

- pay out higher returns to shareholders- encourage more people to buy shares

Question 7

other obj of firms?

Answer 7

• sales maximsation (can benefit from EoS)
• Survival
• Growth
• increasing market share (can get benefits of monopoly power)

Question 8

Perfect competition - price taker

Answer 8

a firm that is unable to influence the ruling market price therefore has to accept it

Question 9

Assumption of perfect competition

Answer 9

• few B2E
• perfect knowledge
• products are homogenous

Question 10

Advantages of perfect competition

Answer 10

productive efficiency - goods and services produced at minimum average cost
allocative efficiency - produce what consumers demand

Question 11

monopolistic competition

Answer 11

• imperfect competition
• large number of firms producing slightly differentiated products
• low b2e

Question 12

Characteristic of monopolisitc competition

Answer 12

1) Large number of producers
2) similar products differentiated
3) low B2E

Question 13

Oligopoly

Answer 13

market structure dominated by a small number of powerful firms

Question 14

Concentration ratioa

Answer 14

measurement of how conentrated a market is- the total market share held by the larger firm in a market- add their percentages

Question 15

collusion

Answer 15

firms work together to determine price / output

Question 16

Tacit collusion

Answer 16

no formal agreement between firms

Question 17

overt collusion

Answer 17

formal agreement

Question 18

what happnes when collusive agreements are made

Answer 18

• consumers are presented with effective monopoly and benefits and drawbacks
• allow inefficient firms to survive

Question 19

Non price competition

Answer 19

• product differentiation
• customer service
• loyalty products

Question 20

Monopoly power

Answer 20

the power of a firm in a market to act as a price maker

Question 21

characteristics of monopoly power

Answer 21

• high B2E
• restrict output and raise price- boost supernormal profit
• because of high B2E, can maintain these profits low comp

Question 22

Advantages of monopolies

Answer 22

1) economies of scale
2) innovation - firms make supernormal profit- more funding available to invest in research and development leading to innvotion

Question 23

Price discrimation

Answer 23

where firms with monopoly power charge different groups of consumers different prices for the same product
- increases producer surplus at the expense of consumer surplus

Question 24

conditions necessary for price discrimination

Answer 24

1) must have a degree of monopoly power
2) consumers being charged higher prices cant access cheaper prices
3) different sub markets of consumers with different elasticities of demand

Question 25

Consumer surplus

Answer 25

the difference between what a consumer would be prepared to pay for a good or service and the price they actually pay

Question 26

Producer surplus

Answer 26

the difference between what a firm would be willing to accept for a good or service and what they actually receive

Question 27

Advantages of price discrimination

Answer 27

- supernormal profits may be reinvested by price discriminating firm - better qual productus - those on lpwer incomes may now be able to access servics

Question 28

Disadvantages of price discrimination

Answer 28

- if firm with monopoly power is able to increase supernormal profit- inequitbale - increases producer surplus at the expense of consumer surplus

Question 29

price competition

Answer 29

reducing the price of a good or service in order to make it more attractive against competitors leads to dynamic efficiency

Question 30

dynamic efficiency

Answer 30

- improvements in productive effiency over time | - reduces firms costs therefore they can reduce price

Question 31

x- inefficiency

Answer 31

the lack of willingness of firms with monopoly power to control their costs of production

Question 32

When does a firm profit maximise?

Answer 32

MC = MR

Question 33

Satisficing

Answer 33

making do with a satisfactory suboptimal level of profit

Question 34

Perfect competition in the short run

Answer 34

- firms may make supernormal profit - encourages firms to join the industry due to competitive market and low b2e - shifts supply to the right - increase in supply, reduction in price - normal profit

Question 35

Perfect competition in the long run

Answer 35

- can only make normal profit in the long run - productively efficient - allocatively effiicient (P = MC)

Question 36

Why is monopoly curve downward sloping?

Answer 36

product differentiation- price makers

Question 37

Long run monopolistic competition

Answer 37

can only make normal profit

Question 38

Cartel

Answer 38

a collusive agreement among a group of oligopoly firms to fix prices and output between themselves

Question 39

Interdependent

Answer 39

firms in oligopoly take into account the likely actions of other firms in the industry when deciding how to behave

Question 40

Interdependent

Answer 40

firms in oligopoly take into account the likely actions of other firms in the industry when deciding how to behave

Question 41

Why oligopolies have stable prices (kinked demand)

Answer 41

- firm perceives demand curve as being elastic if raises its price and inelastic if cuts - this is because the firm expects rival firms not to follow a price rise - if firm increase price and rivals don't follow suit = lose market share - if firm cuts price, others follow no increase in market share for individual firm

Question 42

Disadvantages of monopolies

Answer 42

- productively inefficient - allocatively inefficient - x inefficient

Question 43

Monopolistic competition in the SHORT RUN

Answer 43

- brand loyalty = downward sloping demand curve - firm maximises profit when MC = MR - make supernormal profit

Question 44

Monopolistic competition in the LONG RUN

Answer 44

- only make normal profit - low B2E = new firms enter the industry relatively easily, attracted by supernormal profits made by some firms - effect of this is to reduce the demand (D=AR) for the individual firm as new entrants take some market share - result : D=AR curve is tangential to the firm's ATC curve, meaning normal profit is made at the the profit maximising output q1

Question 45

Examples of monopolies

Answer 45

``` Tesco = 30% market share in groceries market Google = 90% market share of internet traffic ```

Question 46

Examples of barriers to entry

Answer 46

- natural - economies of scale - legal barriers - product differentiation - sunk costs

Question 47

B2E EoS

Answer 47

- firm's average cost of production fall as output rises - large firms can set prices below potential new entrants an still make snp - PURCHASING ECONOMIES OF SCALE

Question 48

B2E legal barriers

Answer 48

patents, copyrights and trademarks give a single firm the right to have a monopoly over a new product EG James Dyson holds many patents over original designs for household appliances, cannot be legally copied

Question 49

B2E product differentiation

Answer 49

-existing firms spend considerable sums of money over many years on advertising and branding - build up consumer loyalty and marketing profile EG Coca Cola and PepsiCo spent billions of dollars on advertising- sponsorship of major sporting events such as football World Cup

Question 50

Productive inefficiency monopolies

Answer 50

- firms produce at a minimum average total cost - monopolies do not have to be competitive to survive, because they dont face the threat of firms taking their market share therefore little incentive to cut cost to the minimum

Question 51

Allocative Inefficiency Monopolies

Answer 51

- monopolies don't have to produce the 'best' goods and services because few competitors - consumers have little choice

Question 52

X inefficiency monopolies

Answer 52

lack of willingness of firms with monopoly power to control their costs of production - operate with higher costs than necessary

Question 53

Natural Monopoly

Answer 53

a market where a single firm can benefit from continuous economies of scale - it is productively efficient for just a single firm to supply the market, as several individual firms could never achieve the low costs of the single firm

Question 54

Natural Monopolies Economies of Scale

Answer 54

- experience continuous economies of scale - implies that if the market were broken into more than one firm, average costs would be higher than for a single firm, meaning that prices might have to be higher.

Question 55

Contestable markets

Answer 55

a market with freedom of entry and exit

Question 56

Impact of a contestable market

Answer 56

- leads to incumbent firms behaving in economically desirbale ways with regard to pricing and static efficiency - due to the threat of new entrants taking a share of any supernormal profits that might exist if the firms did not act as if they were in a perfectly comptetitve industry

Question 57

Static efficiency

Answer 57

productive + allocative efficiency