Perfect & Imperfectly Competitive Markets & Monopolies Flashcards
(144 cards)
1
Q
what are some characteristic’s of markets ?
A
- number of firms in a market
- the degree of product differentiation
- barrier to entry
2
Q
what are some examples of barriers to entry ?
A
pricing strategies
economies of scale
reputation
brand loyalty
control over technology
reputation
3
Q
what are the 3 main objectives of firms ?
A
profit maximization
survival
growth
4
Q
where does profit maximization occur ?
A
MC=MR
5
Q
what are the positive consequences of profit maximization ?
A
- higher wages for employees
- larger dividends for shareholders
6
Q
what can profit maximization lead to ?
A
retained profits, which is a cheap source of finance
7
Q
which form of business is likely to profit maximize in the short run and why ?
A
PLCs, to keep shareholders happy
8
Q
why do some businesses choose to have survival as their main objective ?
A
because they are new firms entering the market
9
Q
why do some businesses choose to have growth as their main objective ?
A
their aiming to increase the size of their firm
10
Q
how do business tend to grow ?
A
economies of scale
11
Q
why is using economies of scale a good way to grow your business ?
A
lowers the firms AC, allowing them to be more profitable
12
Q
what are the characteristic’s of a perfectly competitive market ?
A
. many buyers and sellers
. sellers are price takers
. free entry and exit from market
. perfect knowledge
. homogenous goods
. firms are short run profit maximisers
13
Q
in a perfectly competitive market how is price determined ?
A
the interaction of demand supply
14
Q
how is the market share distributed in a perfectly competitive market ?
A
each firm has a very small market share
15
Q
if a firm has a small market share, what does that mean ?
A
their market power is very small
profits are reduced
16
Q
why does the barrier of entry reduce if firms in that market are making higher profits ?
A
because the market seems profitable and therefore firms will want to enter that market
17
Q
what will happen if increasingly firms are entering the market ?
A
supply will increase, reducing the average price, and existing firms profits will be competed away
18
Q
what is a pure monopoly ?
A
a sole seller in a market
19
Q
what are some factors of monopoly power ?
A
- economies of scale
- barrier to entry
- owning a resource
- brand loyalty
- setup costs
20
Q
drawback’s of monopoly power ?
A
- high prices will lead to misallocation of resources
- monopolies could exploit the consumers by charging higher prices
- this will result in underconsumption, and therefore consumer wants and needs are not met
- this loss of allocative efficiency is a form of market failure
- production costs are high because monopolies have no incentive to become more efficient, due to a lack of competition
- loss of consumer surplus, and a gain in producer surplus
21
Q
benefits of a monopoly ?
A
can use economies of scale to lower production costs
huge profits to be invested in research and development to increase dynamic efficiency (improved technology and automation)
22
Q
what do firms compete on other than just price ? (non-price competitors)
A
- improving products
- reducing costs
- quality of service
23
Q
which market structures compete imperfectly ?
A
monopolistic
oligopoly
monopoly
24
Q
what is monopolistic competition ?
A
a market structure where many firms offering a similar product but with some product differentiation
25
what is a oligopoly ?
a market structure in which few firms dominate the industry
26
what is a monopoly ?
a market structure where there is a single supplier of a particular product, and has 100% market share
27
how is market failure caused ?
through the abuse of market power
28
what are 4 signs of market failure ?
-The ability of suppliers to have control of prices
-The ability of suppliers to restrict output in a market so as to raise prices
-A lack of allocative efficiency
-A lack of productive efficiency
29
how do governments regulate markets and intervene to prevent or reduce the abuse of market power ?
anti-monopoly laws
competition policy
30
what is market power ?
refers to the ability of a firm to influence and control the conditions in a specific market,
allowing them to have a significant impact on:
-price
-output
31
how can market power be measured ?
market share
concentration ratio
barriers to entry
32
The closer a firm is to being a monopoly ... ?
the less competition
33
The closer a firm is to being a perfectly competitive ... ?
the more competition
34
from the cost curve diagram of a monopoly how can we tell that this firm has market power ?
the MR and AR curves are downward sloping
35
how do you determine the level of profit a firm is making from its cost curve ?
To determine the level of profit:
1)> identify where MC = MR (profit maximisation point) and then extend the dotted line upwards to the point where it hits the AR curve - this is your selling price
2)> Where this line crosses the average cost curve (AC) represents the cost per unit at this level of output
3)> The profit is the difference between the selling price and the average cost
36
what are some advantages of pursuing profit maximisation ?
* financial stability and growth (by accumulating capital it gives the firms the opportunity to reinvest)
* shareholder value creation (enhance shareholder value, attract new investors and maintain their competitiveness)
37
what are some disadvantages of pursuing profit maximisation ?
- ethical and social concerns (focusing on profit maximisation can result in actions that disregard the well-being of employees, communities, and the environment)
- risk of neglecting non-financial metrics (employee satisfaction, customer loyalty, product quality etc.)
- Extracting the highest level of short term profits will often detract from future value creation through research or innovation
38
why can you only profit maximise in the short run, and not in both the short and long run ? , and why does PM in the short run eat away your profits in the long run ?
if your profit maximising in the short run, your not using research or innovation to attempt to increase profits in the future, so this will often detract from future value creation.
39
what is profit satisficing ?
where firms aim to make only a satisfactory level of profit, and not seek to maximise profits
40
what is divorce ownership of control ?
occurs when there is a spilt between the ownership of a firm and those who run the business on a day-to-day basis
41
what are the characters of perfect competition ?
- many buyers and sellers
- no barriers to entry
- buyers and sellers have perfect knowledge of prices
- homogeneous products
- firms are price takers
42
why are firms in a perfectly competitive market price takers ?
Firms in perfect competition have low market power, low market share
The firm does not have any market power so it is unable to influence the price and quantity
The firm is a price taker due to the large number of sellers
The firm's selling price is the same as the market price
43
are firms in a perfectly competitive market able to make a supernormal profit in the short run ?
yes
44
why are supernormal profits for firms in a perfectly competitive market not possible in the long run ?
If firms in perfect competition make abnormal profit in the short-run, new firms are attracted to the industry
They are incentivised by the opportunity to make abnormal profit
There are no barriers to entry
It is easy to join the industry
The supply increases, and the industry price falls
The firms are now making a normal profit
45
what can cause firms in a perfectly competitive market to make a loss in the short run ?
periods of intense competition can cause prices to fall below the average costs
46
why are losses eliminated in the long run for firms operating in a perfectly competitive market ?
If firms in perfect competition make losses in the short-run, some will shut down
supply decreases, causing the industry price to increase
47
what is a monopolistic market structure ?
A monopolistic market structure is one in which there are many firms offering a similar product but with some product differentiation
e.g. nail salon, barbers
48
what are the characteristics of monopolistic competition ?
- slightly differentiated products
- good efficiency due to competition
- supernormal profit in the short run, normal profit in the long run
- in between price taker/maker
- low barriers to entry
- large number of small firms
49
what are some non-price competition strategies in monopolistic markets ?
location
quality & customer focus
shop environment
owner personality & store image
word of mouth advertising
local marketing initiatives
50
what is an oligopoly ?
a market structure, in which a few large firms dominate the industry (each having significant market power)
51
what are the 4 main characteristics of an oligopoly ?
- high barriers to entry and exit (high start up costs, lots of money lost if leave)
high concentration ratio
firms are highly interdependent on each other
high product differentiation
52
what is the concentration ratio ?
the percentage of the total market share a specific number of firms have
53
what is the most common way firms in a oligopoly compete ?
non-price competitors (product differentiation)
54
what are the reasons why firms in an oligopoly market engage in non-price competition ?
- to limit price wars (firms undercutting each other)
- to limit price fixing
55
what are the advantages of oligopolys ?
* consumers may benefit from lower prices and better quality products due to competition and economies of scale
*firms generate super normal profits due to lower costs, which can be reinvested into research and envelopment
*competition incentivises firms to improve he quality of their products
56
what are the disadvantages of oligopolys ?
- High barriers to entry restrict the number of firms entering the market (due to high start up costs ) (lack of innovation)
-High levels of spending on branding and advertising can increase production costs
57
what is a monopoly ?
a market structure in which there is a single seller
no substitute products
high barriers to entry
has more than 25% market share (UK Competition & Markets Authority) they act in order to prevent monopolies
58
why can monopoly's make a supernormal profit in the short run and the long run ?
because competitors are unable to enter the industry
59
is a monopoly a price maker or taker ?
price maker
60
what are the advantages of a monopoly to the firm ?
supernormal profits (reinvestment)
global competitiveness
Economies of scale (can increase, thereby lowering the average cost)
Producer surplus increases
61
what the disadvantages of a monopoly to the firm ?
lack of incentive to be efficient (no competitors)
can lead to a misallocation of resources
62
advantage of a monopoly to the employees ?
Supernormal profits often result in higher wages
63
disadvantage of a monopoly to the employees ?
Having only one supplier in the industry limits the opportunity to change employers
64
advantage of a monopoly to the consumers ?
Product innovation due to the firm's supernormal profits may result in a better-quality product
Prices may fall If firms pass on their cost savings (due to economies of scale) in the form of lower product prices
65
disadvantage of a monopoly to the consumers ?
A lack of competition is likely to result in higher prices as no substitute goods are available
May experience worse customer service as the incentive to improve it is limited
Consumer surplus decreases
66
when does price discrimination occur ?
when a firm charges a different price for the same good/service in order to maximize its revenue
67
what is third degree price discrimination, and an example ?
occurs when a firm charges different prices to different consumers for the same good/service.
e.g. train fairs are different prices at different times of the day
68
what are the advantages of price discrimination to firms ?
* The total revenue of producers increases leading to higher profits
* Firms increase their producer surplus at the expense of a decrease in consumer surplus
69
what are the disadvantages of price discrimination to consumers ?
- Many consumers will lose out as they pay higher prices
70
what are the benefits of competition ?
price reductions
&
improved quality
71
what are the short run benefits of competition ?
lower prices (firms lower prices to gain market share)
more choice (more sellers)
customer satisfaction (firms compete using non-price strategies)
72
what are long run benefits of competition ?
sustained lower prices (only the most efficient firms will survive in the long term)
technology improvements (long term competition increases the pace of innovation)
long term quality (abnormal profits can be invested into R&D)
73
what are 5 common non-price strategies ?
After-sales service
Packaging
CSR (Firms adapt to social and environmental concerns to show their ethical commitment
Delivery policies
Improved quality
74
what is creative destruction ?
the process of innovation and technological change leads to the replacement of old technologies
75
what is a contestable market ?
threat of new entrants because there is freedom of entry into a market and where costs of exit are low
76
define allocative efficiency ?
at this point resources are allocated in such a way that consumers and producers get the maximum possible benefit.
occurs where (MC=AR)
No one can be made better off without making someone else worse off
77
define productive efficiency ?
At this point, average costs are minimized
(MC=AC)
78
define dynamic efficiency ?
long-term efficiency and is a result of innovation as a firm reinvests its profits
It results in improvements to manufacturing methods
e.g. technological advancements
79
what is the consumer surplus ?
the difference between the amount the consumer is willing to pay for a product and the price they have actually paid.
80
what is producer surplus ?
the difference between the amount the producer is willing to sell a product for and the price they actually do
81
is consumer surplus below or above the ME price (where demand=supply) ?
above, because the higher the price the greater welfare loss for the consumer (Less utility)
82
is below surplus below or above the ME price (where demand=supply) ?
below, because the lower the price the greater welfare loss for the producer (less profit)
83
when the market is at equilibrium ?
producer and consumer surplus are maximised
84
consumer surplus + producer surplus =
societal surplus
85
in a monopoly 1............ surplus is greater than 2............. surplus.
1) producer
2) consumer
86
why is producer surplus greater than consumer surplus in a monopoly ?
Due to the lack of competition, monopolies tend to have higher prices and lower output
87
because monopoly's profit maximise, what also occurs on the diagram ?
a deadweight loss (rest of shaded triangle after PM point)
this indicates the loss to society of a lack of efficiency in the allocation of resources
88
what is free trade ?
the movement of goods and services across borders without barriers to trade
89
what are the economic benefits of free trade ?
flow of new idea
economic development
economic growth
increased efficiency
access to resources
international cooperation
greater choice
lower prices
90
what are the main characteristics of a market ?
- number of buyers
- number of sellers
- size of firms
- type of product
- types of barriers to entry or exit
- degree of competition
91
what are some examples of imperfectly competitive markets ?
monopolistic competition, oligopolys, monpolies
92
how are market failures caused ?
through the abuse of market of power
93
what are some signs of market power abuse ?
- ability of suppliers to control prices
- ability of suppliers to restrict output
- lack of allocative efficiency
- lack of productive efficiency
94
how do governments regulate to market power ?
governments often regulate markets and intervene to prevent or reduce the abuse of market power through:
.anti-monopoly laws
.competition policy
95
define market power
the ability of firms to influence and control the conditions in a specific market, allowing them to have significant impact on price and output
96
what are the main objectives of firms ?
Profit maximisation
Growth
Survival
Social-welfare
Satisficing
97
what are advantages of profit maximisation ?
+ financial stability & growth (firms can accumulate capital to re-invest)
+ shareholder value creation (greater investment)
98
when does divorce of ownership occur ?
when there is a clear split between the ownership of the firm and those who run it on a day-to-day basis.
99
where does divorce of ownership occur ?
large firms
100
why does divorce of ownership occur ?
because firms owners will appoint managers to make decisions and repeat their interests. Managers may have different goals to the owners, leading to conflict of interest.
101
what are two example of divorce of ownership in different types of business forms ?
. PLC
. Family Businesses
102
how does divorce of ownership occur in PLC's ?
a board of directors or executives are responsible for decision making
a shareholder owns a part of the business, but lacks influence over decision making
conflicts of interest may arise if the board of directors prioritise other objectives other than profit maximisation
103
how does divorce of ownership occur in Family Businesses ?
not all family members are involved in daily management of the business
control rests with a small group of family member usually
conflicts of interest may arise if some family members aim to pursue objectives such as long-term stability instead of profit maximisation
104
what are the characteristics of perfect competition ?
- many buyers and sellers
- sellers are price and takers
- no barriers to exit and entry
- buyers and sellers possess perfect knowledge of prices (if one firm lowers there price, buyers will know)
- homogeneous products (unable to build brand loyalty)
105
why do governments encourage more competition in markets ?
there is little market failure in perfectly competitive industries
106
where a firms in perfect competition able to make an abnormal profit ? and why ?
in the short run , because a seller can gain a competitive advantage in the short run, allowing them to make an abnormal profit
107
why are abnormal profits eliminated for firms in perfect competition in the long run ?
new firms are attracted to the market due to the opportunity to make an abnormal profit
there are no barriers to entry
108
on a perfectly competitive diagram, how would you illustrate new firms joining the market increasing competition and forcing prices down ?
outward shift in the supply curve
109
how can firms in perfect competition make a loss in the short run ?
period of intense competition can cause prices to fall below AC
new firms join the market leading to the market share being divided up
110
why are losses in the short run for firms in perfectly competitively markets eliminated in the long run ?
if firms are making losses in the short run, some will shut down
111
where does allocative efficiency occur ?
AR = MC
112
what is allocative efficiency ?
the point at which resources are allocated in such a way that consumers and producers get the maximum possible benefit
no one can be made better, without making someone else worse off
no excess demand
no excess supply
113
what is productive efficiency ?
the level of output where costs are minimised
AC=MC
no wastage of scarce resources, and a high level of factor productivity
114
characteristics of monopolistic competition ?
- slightly differentiated products
- allocatively efficient in the long run
- low customer loyalty, due to high no. of substitutes
- supernormal profit in short run
- normal profit in long run
- some degree of price setting
- low degree of market power amongst firms
- low barriers to exit & entry
- large number of small firms
115
how do firms in monopolisitic competition make a supernormal profit in the short run if they are operating in a monopolistically competitive market ?
whats an example ?
because firms have he ability to differentiate their products they can innovate
as a result they can charge higher more premium prices for their product
(barber shops introducing coffee whilst waiting)
116
why will firms who are making a supernormal profit in the short run, have the profits eliminated in the long run if they are operating in a monopolisitcally competitive market ?
competitors will update and innovate their product
also new firms will be inentivised into the market due to the potential of making a supernormal profit, increasing the supply and reducing the market price
117
what is another way firms in monopolisitically competitive markets compete ?
non-price competition strategies
118
what are firms operating in monopolisitically competitive markets aiming to do when using non-price competition strategies ?
increase product differentiation
increase brand loyalty
increase market share
119
what are the 6 examples of non-price competition strategies ?
. location
. quality & customer focus
. shop environment
. owner personality & store image
. word of mouth advertising
. local marketing initiatives
120
what is an example of location (non-price competition) ?
businesses can position shop in areas with high consumer traffic
121
what is an example of quality & customer focus (non-price competition) ?
delivering quality services, personalised consultants & tailored treatments
122
what is an example of shop environment (non-price competition) ?
firms can invest in visually appealing shop fronts & environments
123
what is an example of owner personality (non-price competition) ?
using personal expertise of owner to establish a distinct identity & build a loyal customer base
124
what is an example of word of mouth advertising (non-price competition) ?
businesses can ask customers to spread positive reviews and recommendations
125
what is an example of local marketing initiatives (non-price competition) ?
local clubs can sponsor local clubs, to create brand visibility
126
what is a collusive oligopoly ?
where firms cooperate to fix prices and restrict output
(its illegal, and reduces consumer surplus)
127
what is a non-collusive oligopoly ?
firms will actively compete to maintain/ increase their market share
128
what is the most common way in which firms in oligopolys compete ?
non-price competition
129
why do firms in oligopolys usually avoid price competition ?
can cause price wars
130
what are price wars ?
a situation where firms will continuously lower their prices as a competitive response
131
what is the kinked demand curve, and what does it represent ?
a kinked demand curve of a firms cost curve diagram
demonstrates price stability
(if prices are reduced it increases the in-elasticity of demand for the product however, it reduces the revenue and profits the firms recieve
therefore there is a mutual interdependence between firms where they will only reduce prices to a certain extent
132
what are the main 5 reasons why firms in oligopolys engage in non-price competition ?
cartels (agreeing on a fixed price for their product)
price leadership (dominant firm price sets)
price agreements (price fixing)
price wars
barriers to entry (firms develop their advertising and branding)
133
what is first degree price discrimination ?
When consumers are charged the exact price they are willing and able to pay for a good/ service, eroding the entire CS, turning into monopoly profit.
134
what is second degree price discrimination ?
Occurs when there is a business with a fixed capacity (e.g. airline, football stadium). The business will temporary lower their prices to fill spare capacity, and achieve extra revenue.
Constant MC because capacity is fixed at a certain level of output. (Certain no. of train seats)
135
what is third degree price discrimination ?
When the business will segment the market into different price elasticities of demand.
One group of consumer with elastic PED (leisure travellers)
One group of consumer with inelastic PED (commuters to work)
Constant MC because capacity is fixed at a certain level of output. (Certain no. of train seats)
136
what are the conditions required for price discrimination to occur ?
. market power
. varying price elasticity of demand
. ability to prevent resale of tickets (market seepage)
137
if you were illustrating third degree price discrimination of a train company, what would the demand curve look like on their cost curve diagram ?
kinked demand curve
138
How are firms able to make a supernormal profit in the SR in a perfectly competitive market ?
By acheiveing lower costs of production.
139
What determines whether a business will shut down, or continue in the SR (perfect competition, fierce competition in the market) ?
The difference between their loss if they continue and there loss if they shut down.
Some firms will make less of a loss if they stay in the market. (They may still be covering their Average variable costs.)
Shutdown if AVC > AR
Don’t shutdown if AVC < AR
140
When should a business definitely shut down ?
When AR < AVC
141
What is the break even condition ?
Where AV = AC.
This formula can be used to find out what type of profit a firm is making.
142
What is static inefficiency ?
Where the 3 efficiencies:
(Allocative, productive, X, efficiency’s are not achieved)
E.g. monopoly
143
What is price seepage ?
Prevent resale of good/services
144
Pro and cons of Price discrimination ?
Cons:
Allocative inefficiency
Inequalities (those on lower incomes may be affected more)
Anti competitive
Pros:
Greater profits, greater reinvestment
Economies of scale
Some consumer benefit
Cross subsidisation (fund the continuing production of loss making goods in the business)
Gives those on lower incomes or in poverty greater access to goods and services they may not otherwise be usually able to afford
