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Flashcards in The Firm and Market Structures Deck (17):
1

Perfect competition

Homogenous product, no single producer large enough to influence market prices; earn normal profit

2

Monopolistic competition

Large number of firm, differentiated on product leading pricing power

3

Oligopoly

Small number of firms supply market, each careful only to protect from retaliatory strategies of others in market

4

Pure monopoly

No other good substitutes for a product, single seller

5

Describe firm's supply structure under each market structure

a

6

Describe and determine optimal price and output for firms under each market structure

Firms maximize profits when marginal revenue = marginal cost

Monopolists don't have supply curves - quantity produced is where MR=MC

7

Explain factors affecting long-run equilibrium under each market structure

Perfect competition - entrants will increase supply if there is economic profit, so firms operate at zero economic profit (firms just cover rental cost of capital).

Monopolistic competition - risk of entrants will keep economic profits to zero

Oligopoly - long run economic profits possible, but market share of dominant firm generally declines as new entrants trickle into market

Monopoly - economies of scale and threat of regulation may make monopolies more efficient than perfect competition.

8

Describe pricing strategy under each market structure

Perfect comp - beholden to market demand/supply (price taker)

Monopolistic comp - each firm sets price based on its differentiation

Oligopoly - competitors actions greatly affect pricing

Monopoly - firm sets price subject only to low risk of entry or regulation if price too high

9

Describe use and limitations of concentration measures in identifying market structure

Concentration ratio is sum of market shares of largest firms, but does not directly quantify market power, tends to be unaffected by mergers of big firms, and do not take account of entry into market

HHI ratio is sum of squared market shares, which solves merger issue

10

Identify type of market structure within which a firm operates

Look at:
Number of firms
Their market shares
Nature of competition
Availability of substitute goods
Barriers to entry and exit

11

In perfect competition, explain relationship between:

Price
Marginal revenue
Marginal cost
Economic profit
Elasticity of demand

price = marginal revenue = marginal cost

perfectly elastic demand curve

zero economic profit

12

In monopolistic competition, explain relationship between:

Price
Marginal revenue
Marginal cost
Economic profit
Elasticity of demand

price > marginal revenue = marginal cost

Downward sloping firm demand curve

zero economic profit in long run

13

In oligopoly, explain relationship between:

Price
Marginal revenue
Marginal cost
Economic profit
Elasticity of demand

price > marginal revenue = marginal cost

Downward sloping firm demand curve

Maybe positive economic profit in long run

Tends toward zero economic profit over time

14

In monopoly, explain relationship between:

Price
Marginal revenue
Marginal cost
Economic profit
Elasticity of demand

price > marginal revenue = marginal cost

Downward sloping firm demand curve

Maybe positive economic profit in long run

Profits tend toward zero because of costs of preserving monopoly

15

Elasticity of demand

= - (% change in quantity) / (% change in price)

> 1 elastic
= 1 unitary elastic
< 1 inelastic

16

Cournot assumption

In oligopoly, assumption that each firm decides its profit maximizing level by assuming other firms will not change output

17

Nash equilibrium

Firms have no incentive to deviate from equilibrium strategies after considering other firms' rational responses