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paper 1 economics > Perfect Competition, Imperfectly Competitive Markets and Monopolies > Flashcards

Perfect Competition, Imperfectly Competitive Markets and Monopolies Flashcards

1
Q

Market structure

A

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

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2
Q

Perfect competition

A

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

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3
Q

imperfect competition

A

any market structure that isn’t perfect competition

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4
Q

pure monopoly

A

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

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5
Q

what is the main objective of firms?

A

-profit maximisation

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6
Q

why firms want large profits?

A
  • reinvest funds into developing new products

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

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7
Q

other obj of firms?

A
  • sales maximsation (can benefit from EoS)
  • Survival
  • Growth
  • increasing market share (can get benefits of monopoly power)
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8
Q

Perfect competition - price taker

A

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

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9
Q

Assumption of perfect competition

A
  • few B2E
  • perfect knowledge
  • products are homogenous
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10
Q

Advantages of perfect competition

A

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

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11
Q

monopolistic competition

A
  • imperfect competition
  • large number of firms producing slightly differentiated products
  • low b2e
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12
Q

Characteristic of monopolisitc competition

A

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

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13
Q

Oligopoly

A

market structure dominated by a small number of powerful firms

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14
Q

Concentration ratioa

A

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

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15
Q

collusion

A

firms work together to determine price / output

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16
Q

Tacit collusion

A

no formal agreement between firms

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17
Q

overt collusion

A

formal agreement

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18
Q

what happnes when collusive agreements are made

A
  • consumers are presented with effective monopoly and benefits and drawbacks
  • allow inefficient firms to survive
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19
Q

Non price competition

A
  • product differentiation
  • customer service
  • loyalty products
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20
Q

Monopoly power

A

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

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21
Q

characteristics of monopoly power

A
  • high B2E
  • restrict output and raise price- boost supernormal profit
  • because of high B2E, can maintain these profits low comp
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22
Q

Advantages of monopolies

A

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

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23
Q

Price discrimation

A

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

24
Q

conditions necessary for price discrimination

A

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

25
Q

Consumer surplus

A

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

26
Q

Producer surplus

A

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

27
Q

Advantages of price discrimination

A
  • supernormal profits may be reinvested by price discriminating firm - better qual productus
  • those on lpwer incomes may now be able to access servics
28
Q

Disadvantages of price discrimination

A
  • if firm with monopoly power is able to increase supernormal profit- inequitbale
  • increases producer surplus at the expense of consumer surplus
29
Q

price competition

A

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

30
Q

dynamic efficiency

A
  • improvements in productive effiency over time

- reduces firms costs therefore they can reduce price

31
Q

x- inefficiency

A

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

32
Q

When does a firm profit maximise?

A

MC = MR

33
Q

Satisficing

A

making do with a satisfactory suboptimal level of profit

34
Q

Perfect competition in the short run

A
  • 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
35
Q

Perfect competition in the long run

A
  • can only make normal profit in the long run
  • productively efficient
  • allocatively effiicient (P = MC)
36
Q

Why is monopoly curve downward sloping?

A

product differentiation- price makers

37
Q

Long run monopolistic competition

A

can only make normal profit

38
Q

Cartel

A

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

39
Q

Interdependent

A

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

40
Q

Interdependent

A

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

41
Q

Why oligopolies have stable prices (kinked demand)

A
  • 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
42
Q

Disadvantages of monopolies

A
  • productively inefficient
  • allocatively inefficient
  • x inefficient
43
Q

Monopolistic competition in the SHORT RUN

A
  • brand loyalty = downward sloping demand curve
  • firm maximises profit when MC = MR
  • make supernormal profit
44
Q

Monopolistic competition in the LONG RUN

A
  • 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
45
Q

Examples of monopolies

A 
Tesco = 30% market share in groceries market
Google = 90% market share of internet traffic
46
Q

Examples of barriers to entry

A
  • natural
  • economies of scale
  • legal barriers
  • product differentiation
  • sunk costs
47
Q

B2E EoS

A
  • 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
48
Q

B2E legal barriers

A

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

49
Q

B2E product differentiation

A

-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

50
Q

Productive inefficiency monopolies

A
  • 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
51
Q

Allocative Inefficiency Monopolies

A
  • monopolies don’t have to produce the ‘best’ goods and services because few competitors
  • consumers have little choice
52
Q

X inefficiency monopolies

A

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

53
Q

Natural Monopoly

A

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

54
Q

Natural Monopolies Economies of Scale

A
  • 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.
55
Q

Contestable markets

A

a market with freedom of entry and exit

56
Q

Impact of a contestable market

A
  • 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
57
Q

Static efficiency

A

productive + allocative efficiency

paper 1 economics (5 decks)

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