Theme 3 Flashcards
(18 cards)
Monopsony
Occurs when a firm has market power in employing factors of production. Means there is one buyer and many sellers.
Marginal cost formula
Wage rate + difference having to be paid to other workers (to pay all workers the same)
Trade union impacts on wages and employment
Cause higher wages however in competitive markets this can have the effect of causing unemployment of Q1 to Q2.
Concentration ratio
A ratio that measures the extent to which the market is dominated by a few large firms.
Normal profit definition
The maximum profit required to keep factors of production in their current use in the long run. (Included as a cost). Anything above that is considered supernormal profit.
Perfect competition characteristics
- large number of firms
- products are homogenous
- freedom of entry and exit to industry
- price takers (no control)
- each producer supplies small propertion
- consumers and producer have perfect knowledge about the market.
Where do businesses produce
At MC=MR
Perfect competition short run vs long run profit
Short run they make supernormal profit however long run new businesses enter the market and supply increases causing prices to reduce. When supernormal profit is made new firms enter the market.
Loss minimisation short run strategy
In the short run if revenue exceeds variable costs they will continue to produce. (Not sustainable long run) if they choose to Leave a market it reduces supply and increased D to create supernormal profit. The shut down point is when VC exceeds revenue. Return to long run equilibrium.
Perfect competition example
Agriculture
- large no of firms
- products very similar
- fairly easy to enter market
- price takers
-super farms make produce large amount however still only provide a small proportion
- consumers and producers do not have perfect knowledge however it can be gained
Pure monopoly characteristics
- one firm is the industry (many buyers one seller)
- only one product
- large barriers to entry
- control / set the price
- supplier provides to everyone/ the whole market
- producers have perfect knowledge, consumers have imperfect knowledge
Pure monopoly short run and long run
Entry to market is restricted / limited so it cannot change over time. Eg apple
Why are monopolies seen as bad
- higher prices
- lower choice
- poorer quality
- less innovation
- lower output
- deemed to be inefficient
Monopolies are deemed to be…
- allocative
- productive
- dynamically inefficient
Examples of monopoly
Apple
- few products
- huge barriers to entry
- set the price
- supplier provides to most
- producers have perfect knowledge
Monopolistic competition characteristics
- large no of firms in industry
- have some element of control over price as they can differentiate their product in some way from rivals
- entry and exit from industry relatively easy
- consumer and producer knowledge is imperfect
Short and long run impact of monopolistic competition
Long run due to lack of barriers to entry firms will see the profit made and enter the market. Overall increasing supply and return to normal profit.
