week 9 Flashcards
(19 cards)
what is perfect competition
all businesses in an industry sell an identical good, and § there are many sellers and many buyers, each of whom is small relative to the size of the market.
sellers have no market power and cant set prices
what is a monopoly
only one seller, high market power
what is an oligopoly
market with a handful of large sellers. Sellers have market power
what is a monopolistic competition
many small businesses compete, each selling differentiated products. Sellers have no market power
what are some insights of an imperfect competition?
- Market power allows you to pursue independent pricing strategies.
- Having more competitors leads to less market power.
- Successful product differentiation gives you more market power.
- Imperfect competition among buyers gives them bargaining-power.
- Your best choice depends on the actions that other businesses make
with no market power what would raising your prices above the market price mean
you will sell nothing go lower than the demand curve and you will sell a huge quantity
with high market power what would raising your prices above the market price mean
you increase price you will still have customers but lower price will gain some more customers but not all
what is the output effect?
The output effect is the revenue increase from selling one more unit
what is discount effect?
Discount effect is the revenue loss from cutting the price on all the units sold
what is marginal revenue?
the increase in revenue that results from the sale of one additional unit of output
how do we calculate marginal revenue?
reflects the output effects minus the discount effect
what are some problems with firms having high market power?
it can distort market forces which can lead to worse outcomes. eg life saving drugs can be really expensive to make. Pharmaceutical companies need patents, which give them the incentives to spend billions of dollars to invent new drugs
When comparing market power and perfect competition it leads to what assumptions
- Market power leads to higher prices.
- Market power leads to inefficiently smaller quantity
- Market power yields larger economic profits.
- Businesses with market power can survive even with inefficiently high costs.
- Increased competition leads to better outcomes
what does increased competition lead to?
Competition leads to lower prices and a higher quantity.
Market power leads businesses to produce a lower quantity and sell at a higher price
Higher prices are a problem for customers but a benefit for sellers.
Smaller quantity is not best for society
what helps ensure competition thrives?
laws that minimize the harmful ways that businesses might exploit their market power.
Laws that ensure competition thrives includes anti collusion laws, merger laws (preventing companies from merging to consolidate market power) and they can implement price ceilings to limit market power
what is a natural monopoly?
A market in which it is cheapest for a single business to service the market. Eg water,gas electicity
But the price to produce these goods are too high so the supplier would lose money so The government provides goods.
Set Price = Marginal cost
Tax revenues pay for losses
what is meant by market power?
Market power refers to the extent to which a seller is able to charge higher prices without losing a substantial amount of their customers.
what does market power depend on?
two factors: how many competitors the individual seller faces and how successfully the seller is able to differentiate their products from their competitors. The fewer competitors a seller has and the more it can differentiate its product, the more inelastic the firm demand curve
