WEEK 9 Flashcards
(15 cards)
perfect competition characteristics
- many firms
- homogenous products
- price-taker
- no barriers to entry
- e.g. wheat farmer, textile firm
monopoly characteristics
- one firm
- unique product
- price-maker (still constrained by demand)
- near total barriers to entry
- e.g. public utility, patented drug
monopolistic competition characteristics
- many firms
- differentiated products
- limited price control
- no barriers to entry
- e.g. restaurants, soap
oligopoly characteristics
- few firms
- homogenous or differentiated products
- some price control (less than monopoly, more than monopolistic competition)
- significant barriers to entry
- e.g. automobiles, aluminum
product differentiation
strategy firms use to achieve market power by producing goods that differ from others on the market
horizontal differentiation
- product differs in ways that make it better for some and worse for others
- e.g. making a food spicier than others
vertical differentiation
- product that differs in ways that make it better than rival products for everyone
- e.g. better fuel efficiency
behavioural economics
branch of economics that uses the insights of psychology and economics to investigate decision-making
commitment device
- actions that individuals take in a period to try to control their behaviour in the future
- e.g. pre-paid gym contract
advertising functions
- tells people that products are different
- creates product differentiation by creating brand image
pros of advertising
provides consumers with information on product availability, price, quantity, etc.
cons of advertising
- waste inefficiency: large sums spent to create minute differences between products
- raises cost of products
- usually don’t contain much information
- can serve as a barrier to entry
effect of product differentiation on elasticity
reduces elasticity by increasing the number of close substitutes
pros of monopolistic competition
- no barriers to entry
- profit eliminated in long run
- can lead to the improvement of products and the introduction of new ones
- resulting economic welfare gain may outweigh inefficiency
cons of monopolistic competition
- if a firm achieves any degree of market power, they will profit maximise by holding down production and charging above marginal cost
- equilibrium usually takes place left of the lowest point on the ATC curve so no economies of scale
