market structure: perfect competition and monopoly

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market structure
the market environment within which firms operate
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characteristics of perfect competition?
many firms, no barriers to entry, firms have no influence over price, homogeneous products e.g. cauliflowers and carrots
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characteristics of monopolistic competition?
many firms, no barriers to entry, firms have some influence over price, differentiated products e.g. fast food outlets, travel agents
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characteristics of oligopoly?
few firms, some barriers to entry, firms have some influence over price, varied products e.g. cars, mobile phones
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characteristics of monopoly?
one firm, high barriers to entry, price maker subject to the demand curve, no close substitutes e.g. PC operating systems, local water supply
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PC- how is market price decided?
market price will be driven down to that at which the typical firm in the market just makes enough profit to stay in business
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MC- why is there some scope for influencing price?
brand loyalty
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if there are abnormal profits in the market and no barriers to entry what will happen?
new firms will join the market and the increase in market supply will push price down until no abnormal profits are being made
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perfect competition
a form of market structure that produces allocative and productive efficiency in long run equilibrium
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assumptions of PC
1 firms aim to maximise profits, 2. there are many participants, 3. the product is homogenoeus, 4.there are no barriers to entry or exit, 5. there is perfect knowledge of market conditions
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price taker
a firm that must accept whatever price is set in the market as a whole
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PC- what shape is the demand curve?
perfectly elastic
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PC- why not set a higher price?
will sell nothing, as buyers are fully aware of the market price and they know that there is no quality difference
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PC- why not set a lower price?
can sell as much output as they like at the going price, no incentive to set a price below
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PC- how does it decide how much to produce?`
MR=MC
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short run supply curve
for a firm operating under PC, the curve given by its short run MC curve above the price at which MC=SAVC; for the industry, the horizontal sum of the supply curves for the individual firms
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PC- SMC curve represents?
firms short run supply curve
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PC- best decision in the price falls below SAVC?
exit the market as it will be better off just incurring its fixed costs
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PC- how long with the process of entry last?
for as long as firms are making supernormal profits
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PC- if the demand increases in the short run what is the effect?
pushes the market price up for the industry, because as market price increases existing firms have the incentive to supply more output, the combined supply of the firms increases
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industry long-run supply curve
under perfect competition, the curve that, for the typical firm in the industry, is horizontal at the minimum point of the long-run average cost curve
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PC- what simplifies entry further?
homogenous products
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PC- how is the long run equilibrium reached?
entry of new firms
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PC- when is the LRS perfectly flat?
if all firms face equal cost conditions and if factor prices remain constant as the industry expands
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PC- when may LRS slope upwards?
if firms are not identical and face different cost conditions,because some firms face a more favourable environment than others
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PC- which firms would exit from the market?
as price falls, the least efficient firms would exit until the marginal firm just makes normal profits
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PC- at what point would the firm just make normal profits?
where price (AR)=ATC
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PC- when is productive effiency achieved?
in the long run, but not in the short run, when a firm need not be operating at minimum AC
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PC- how is allocative effiency achieved?
the process by which supernormal profits are competed away by entry of new firms ensures that price=MC in long-run equilibrium
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PC- when is their allocative efficiency?
firms set price=MC even in the short run, so allocative efficiency is a feature of PC in both the short and long run
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weaknesses of PC?
-merely a theoretical ideal, based on a sequence of assumptions that rarely holds -relatively few markets that display all the characteristics -if supernormal profits are always competed away, investment may not take place
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strengths of PC?
-model does hold for some agricultural markets -model provides a measure against which alternative market structures can be compared -economic analysis can be used to investigate the effects of relaxing the assumptions
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natural monopoly
monoply that arises in an industry in which there are such substantial eos that only 1 firm is viable
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what might cause a M?
-technology of the industry
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M- when may there not be more room for more than one firm in the market? (NM)
in a market characterised by substantial eos, this could happen when there are substantial FC of production but low MC
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M- what will happen to new entrants? (NM)
operating at a lower scale, so will inevitablt face higher AC, the existing firms will always be able to price such firms out of the market
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M- in a NM what acts as a barrier to entry?
eos
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M- what are the problems with alllocative efficiency? (NM)
MC
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M- what sort of market would a NM emerge?
substantial FC of operation but relatively low MC
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M- what are markets called where firms have risen to become monopolies by their actions?how is this done? (NM)
competitive monopoly. effective marketing, m&a, establishing a new product
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M- is it productively efficient?
extremely unlikely, will produce at its LRAC only if it so happens that the MR curve passes through this exact point
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M- how is it allocatively efficient?
MR
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M- how is it not allocatively efficient?
price is not equal to MC
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when comparing PC and M what do you put aside?
eos
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In any market what will be the differences between PC and M?
-M produces less output than a PC and charges a higher price -M has a more limited consumer surplus
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compared to a PC, in a M why is there a loss of consumer surplus?
1. redistribution of welfare from consumers to the firm 2.deadweight loss resulting from the monopolisation
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perfect/first-degree price discrimination
a situation arising in a market whereby a monopoly firm is able to charge each consumer a different price
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under price discrimination what price can a monopoly charge? what does the demand curve become?
charge each consumer a price equal to their willingness to pay for the good. the MR
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with price discrimination what happens to consumer surplus?
it becomes producer surplus, the monopolists profits
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with price discrimination what happens to total welfare?
it is the same as under PC, but has been a redistribution from consumers to the monopoly
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when is partial price discrimination possible?
students or OAPs may get discounted bus fares, the young and/or old may get cheaper access to sporting events or theatres
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what are the 3 conditions under which a firm is able to price discriminate?
1.the firm must have market power 2.the firm must have information about consumers and their wllingness to pay-and there must be identifiable differences between consumers, 3.the consumers must have limited ability to resell the product
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why is price discrimination not possible in PC?
no seller has the power to charge other than the going market price
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what makes price discrimination profitable for firms?
different consumers display different sensitivites to price, they have different price elasticities of demand
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arbitrage
a process by which in 2 market segments will be equalised as a result of purchase and resale by market participants
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why should a firm undertake price discrimination?
firm is able to increase its profits by switching sales from a market with a relatively low MR to a market where it is higher
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Other cards in this set

Card 2

Front

characteristics of perfect competition?

Back

many firms, no barriers to entry, firms have no influence over price, homogeneous products e.g. cauliflowers and carrots

Card 3

Front

characteristics of monopolistic competition?

Back

Preview of the front of card 3

Card 4

Front

characteristics of oligopoly?

Back

Preview of the front of card 4

Card 5

Front

characteristics of monopoly?

Back

Preview of the front of card 5
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