Perfect competition, imperfectly competitive markets and monopoly

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Characteristics of Perfect Competition
Perfect information,Price takers,Homogeneous products,No barriers,Large number of buyers/sellers,Allocative, productive and x efficient,Transferable FOP
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Purpose of the perfect competition model
Yardstick against which the desirable and undesirable properties of real-world markets can be measured
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Short run profit maximisation in perfect competition diagram
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Long run profit maximisation in perfect competition diagram
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Advantages of Perfect competition
Allocative/Productive efficient,Low price,No barriers,Competitive
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Disadvantages of Perfect competition
Dynamic inefficiency,Can't benefit from EoS,Discourages entrepreneurship
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What would force a firm to leave the market in perfect competition?
AR falls below AC
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Characteristics of Monopoly
Price maker,One firm,High barriers,Advertisement,Different products,Supernormal profit,Productive and Allocatively inefficient, Dynamically efficient,Economies of Scale,X-inefficiency
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Profit maximisation in a monopoly diagram
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Advantages of Monopoly
Eco of Scale,Dynamic efficiency,RnD,Int comp,Price discrimination
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Disadvantages of Monopoly
Allocative Productive X inefficiency,Exploit consumer,High price
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Characteristics of Oligopoly
Small no of large firms,identical or differentiated products,high barriers,interdependence,Advertising,Competition,No unique price pattern
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Advantages of Oligopoly
Dynamic efficiency, low price(price war),competitive,collusion won't last
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Disadvantages of Oligopoly
Collusion,Cartels,High price,Underconsumption,Allocative/Productive inefficiency
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Interdependence in an oligopoly
Rival firms must take into account of each others actions but don't collude
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Why may collusive behaviour in an oligopoly be beneficial?
Enables firms to reduce uncertainty,Joint product development,Ensuring safety standards
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Explain game theory
Two or more 'players' trying to work out what to do to further their own interests - interdependence
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What is meant by formal collusion?
Agreement between the firms - illegal
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What is meant by informal collusion?
Tacit, happens without any kind of agreement,best interest not to compete
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What is a concentration ratio?
Market share of biggest firms in market
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What is a monopsony?
A market with a single buyer
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What is market conduct?
Prices and policies pursued by firms - Market behaviour
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What is a Cartel?
Collusive agreement by firms - illegal
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Kinked demand curve diagram
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How does an oligopoly expect rivals to react when price is raised or lowered?
Asymmetrically
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Explain kinked demand curve
If when price is raised,demand is elastic,and when price is cut,demand is inelastic,any change in price will reduce rev
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What is price leadership?
The setting of prices in a market, usually by a dominate firm
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What is a price agreement?
An agreement between firm,similar firms,suppliers or customers regarding price
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What is a price war?
Rival firms continuously lower prices to undercut each other
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Characteristics of Monopolistic Competition
Large no of firms,LR no barriers,Product differentiation,Independent decisions,Market power,Imperfect information,Advertisement
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Advantages of Monopolistic Competition
.No barriers,Contestable,Differentiation,Dynamically efficient
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Disadvantages of Monopolistic Competition
.Unnecessary waste,X-inefficiency, Allocative and productive inefficiency,
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SR Monopolistic Competition Diagram
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LR Monopolistic Competition Diagram
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What is a natural barrier to entry?
Result from inherent features such as high RnD and eco of scale
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Name 4 types of artificial barriers to entry?
Patents, Product differentiation, Limit and predatory pricing, Advertisement
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What are limit prices?
Prices set low - unprofitable for new firms to enter market
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What are predatory prices?
Prices set below AC - force rival firms out
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What are sunk costs?
Costs that have already incurred and can't be recovered
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Total profit =
Total Revenue - Total Cost
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What point do firms profit maximise at?
MC=MR, Marginal cost = Marginal revenue
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What is the divorce of ownership from control?
Owners and managers are different - different objectives
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Name three possible business objectives other than profit maximisation
Sales rev max, Growth max, Better product
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Static efficiency
Efficiency at particular point in time, eg Allocative and Productive
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Dynamic efficiency
LR, Development of new products and processes
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Productive efficiency
AC is minimised, lowest point on AC curve
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Allocative efficiency
P=MC,impossible to improve eco welfare by reallocating resources
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X-inefficiency
Inefficiency caused by unnecessary costs and waste
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What is price discrimination?
Different prices to different customers for the same product or service, with prices based on different PEDs
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Conditions necessary for price discrimination
Possible to identify different groups(eg imperfect info or geographical mobility),Groups have different PEDs,Markets must be separated to prevent seepage
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First degree price discrimination
Each individual customer is charged the max they are willing to pay
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First degree price discrimination diagram
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Second degree price discrimination
Lower prices are charged to people who purchase large quantities
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Second degree price discrimination diagram
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Third degree price discrimination
Different prices for the same product to different segments of the market
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Third degree price discrimination diagram
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What is a contestable market?
Potential exists for new firms to enter the market
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Hit-and-run tactics
Hit market to make profit, then run because no/low barriers
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What is deadweight loss ?
The loss of economic welfare when the max attainable welfare is not achieved
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What is consumer surplus?
Economic welfare enjoyed by consumers
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What is producer surplus?
Economic welfare enjoyed by producers
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How can governments try to encourage competition in markets?
Encourage new enterprises,Increase consumer knowledge,introduce more consumer choice,Privatise and deregulating,Discourage mergers and takeovers
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Other cards in this set

Card 2

Front

Yardstick against which the desirable and undesirable properties of real-world markets can be measured

Back

Purpose of the perfect competition model

Card 3

Front

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Back

Preview of the back of card 3

Card 4

Front

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Back

Preview of the back of card 4

Card 5

Front

Allocative/Productive efficient,Low price,No barriers,Competitive

Back

Preview of the back of card 5
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