Markets structures

Question 1

why is MC=MR the pmax

Answer 1

As long as the revenue of producing another unit of output (MR) is greater than the cost of producing that unit of output (MC), the firm will increase its profit by using more variable input to produce more output.

Question 2

What are the assumptions in a monopoly

Answer 2

1. high barriers to entry
2. firms have imperfect knowledge -> gives the monopoly a USP as they can’t replicate goods
3. profit maximiser
4. goods are differentiated

Question 3

where is the productively efficient point

Answer 3

where AC is at its lowest point

MC=AC

Question 4

where is the allocative efficient point

Answer 4

where MC=AR

Question 5

What conditions are necessary for price discrimination

Answer 5

1. monopoly power
2. two different markets with differing elasticities
3. the ability to keep markets separate and prevent seepage

Question 6

what is seepage

Answer 6

Means that a consumer cannot purchase at the low price in the elastic market, and then re-sell to other consumers in the inelastic market, at a higher price.

Meaning the firm will not benefit from increased revenue

Question 7

Why can seepage occur

Answer 7

1. Consumer have imperfect knowledge and a monopoly can sell to consumers at different prices

Question 8

2 Advantages of price discrimination

Answer 8

1. increased revenue can result in dynamic efficiencies

2. beneficial to lower income society

Question 9

3 Disadvantages of price discrimination

Answer 9

1. decline in consumer surplus
2. administration costs
3. those who pay the higher prices may not be the richest consumers.

Question 10

3 benefits of a monopoly

why shouldn’t competition policy be implemented

Answer 10

1. Dynamic efficiencies
2. economies of scale (Eg natural monopolies) and this may translate into lower prices
3. large tax revenues

Question 11

3 negatives of a monopoly

Answer 11

1. X inefficiency. no incentive to cut costs and innovate. -> less consumer surplus
2. higher prices
3. not allocatively efficient

Question 12

how can monopolies improve allocative efficiencies in the long term

Answer 12

If productive efficiency increases this means costs will be kept down, and if these cost savings are passed onto consumer then allocative efficiency can be increased.

Productive efficiency may improve if investment in technology for the production line increases

Question 13

Why may monopolies not profit maximise

Answer 13

1. instead prioritise gaining market share,
2. be socially responsible
3. not for profit (student union)

Question 14

What is the principal agent problem

Answer 14

The principal-agent problem is a conflict in priorities between a person or group and the representative authorized to act on their behalf.

Question 15

Example of principal agent problem

Answer 15

As shareholders have no control over the business and managers can act in a different manner to achieve their personal goals.

Question 16

Monopolistic competition

Answer 16

Here there are a large number of firms in the market selling differentiated products.
This leads to a small degree of market power as each firm offers something different to the others

Question 17

Why can firms in monopolistic competition make SNP in the short run

Answer 17

as product or branding can be differentiated

Question 18

Why can’t firms in monopolistic competition make SNP in the long run

Answer 18

As new firms can enter the market as there are low barriers to entry as demand is shared between more firms in the market.
The firm may be less able to benefit from economies of scale as a result therefore increasing costs

Question 19

why can monopolies make SNP in the long term

Answer 19

They can differentiate their product and as there is imperfect knowledge of production and high barriers to entry other firms are unable to replicate what the monopoly has and erode the monopolies SNP

Question 20

characteristics of an oligopolistic market

Answer 20

1. small number of firms
2. high barriers to entry (economies of scale)
3. differentiated products.

Question 21

problems with an oligopolistic market

Answer 21

1. can prevent innovation
2. may cause collusion and fix prices meaning not all consumers can access their goods
3. negatives of monopolies without the benefit of them (economics of scale)

Question 22

why collusive oligopolies may not be successful

Answer 22

there is always risk of cheating. as firms always seek to maximise profit this is likely

Question 23

when can collusion in oligopolies occur

Answer 23

1. if demand is inelastic

2. imperfect information

Question 24

monopolistic competition characteristics

Answer 24

1. no barriers to entry or exit
2. firms produce differentiated products
3. inelastic demand

Question 25

why can monopolistic competitively firms make SNP in the short run but normal profit in the long run

Answer 25

the SNP earned from incumbent firms attracts new firms to enter the market. this reduces demand for existing eroding the SNP causing normal profit in the long term

Question 26

examples of monopolistic competition

Answer 26

1. restaurants 2. TV programmes 3. Hair dressers

Question 27

perfect competition definition

Answer 27

a theoretical market structure which assumes that all firms sell an identical product, firms are price takers, buyers and sellers all have perfect info and they can enter and exit the market without any additional cost

Question 28

draw the perfect competition graph making SNP in the short run

Answer 28

..

Question 29

why do firms in perfect competition only make SNP in the short run

Answer 29

1. when firms diversify their product (eg only selling green carrots) they may gain more market share. 2. AR>AC meaning SNP is earned in the short run 3. in the long run new firms are attracted into the market as they are incentivised by profit 4. as there is perfect knowledge of production competitors copy products which erodes into the original firms SNP. 5. overtime the supply of the diversified product increases 6. and firms have to lower prices from p1 to p2 to attract demand over competitors as PED is elastic 7. when prices are a P2 no SNP is made in the LT

Question 30

what is the short run

Answer 30

when one factor of production is variable.

Question 31

negatives of monopolies | why is competition policy required

Answer 31

1. they have no incentive to be productively or allocatively efficient as they have market power and can charge their own price and sell at their quantity. the existence of competition may encourage firms to sell at the sales max point (which will benefit consumers) 2. by having competition policy monopolies are encouraged to rnd in order to gain SNP over competitors

Question 32

examples of competition policy

Answer 32

1. subsidising new firm to enter the market and lower their cost of production so they can better compete 2. deregulation making it easier for the new firms to enter

Question 33

examples of colluding oligopolies

Answer 33

1. Organisation of petroleum exporting countries (OPEC) 2. British airways colluded with Virign to increase ticket prices following a rise in oil prices 3. sainsburys colluded with various dairy suppliers to raise prices in other supermarkets

Question 34

how to prevent colluding oligopolies

Answer 34

give immunity to the whistle blowing firm so there is a greater incentive to cheat Competition Act of 1998, states the OFT has the power to impose penalties on companies of up to 10 per cent of their worldwide turnover for breaches of competition law.

Question 35

evaluation of policies increasing competition

Answer 35

1. depends on brand loyalty. if it its so strong government intervention may fail 2. depends on the objectives of the business. firms may prioritise dividend than rnd therefore creating a better product 3. some firms may prefer dynamic efficiency over static efficiency (especially in the tech market) a firms may prevent competition by supplying at AC=AR to maximise sales and increase market share limiting new completion

Question 36

why is there no incentive for firms in an oligopoly to change prices. (oligopoly diagram kinked)

Answer 36

1. if firms were to increase their prices they will lose market share. Demand becomes elastic for price increases 2. if firms were to cut their prices they will gain a lot of market share. However, it is unlikely that firms will allow this. Therefore other firms follow suit and cut-price as well. Therefore demand will only increase by a small amount. Therefore demand is inelastic for a price cut.

Question 37

evaluation of the kinked demand curve

Answer 37

1. Some firms may have very strong brand loyalty and be able to increase the price without demand being very price elastic.

Question 38

draw the collusive oligopolies diagram.

Answer 38

monopoly diagram

Question 39

what is a market imperfection

Answer 39

when the market is not at its equilibrium. for example a labour market imperfection occurs when the wage and the quantity of workers is not at the allocatively or productively efficient point.

Question 40

name 3 labour market imperfections

Answer 40

1. monopsony 2. trade union 3. it can be hard to measure productivity may lead to worker such as teachers to be undervalued.

Question 41

draw a monopsony diagram

Answer 41

sndji

Question 42

examples of price wars in oligopolies

Answer 42

1. short haul air lines | 2. supermarkets

Question 43

arguments for nationalisation

Answer 43

1. natural monopoly- costs of set up is so high that it is pointless for firms to set up. A private natural monopoly could easily exploit its monopoly power and set higher prices to consumers. Government ownership of a natural monopoly prevents this exploitation of monopoly power. 2. profit goes to government revenues (however the cost of taking over an industry may be higher) 3. the financial crisis the government had to buy shares from Lloyds and the RBS giving them liquidity to honour short term debts

Question 44

arguments for privatisation

Answer 44

1. increased profit motive | 2. may be more responsive to changes in consumer demand

Question 45

the shut down condition

Answer 45

the level at which lrtc exceeds average revenue people may enter this market because SNP may be earned which may attract new firms to set up in the short run. and average revenue can be covered by variable costs however in the long run fixed cost may exceed average revenue and it may not be profitable to keep producing

Question 46

oligopoly definition

Answer 46

when few firms with high concentration ratios dominate the market. there are high barriers to entry and firms sell differentiated goods interdependent on other firms

Question 47

where is the sales maximisation

Answer 47

AC=AR when making sales you need to be on A game

Question 48

ways to increases contestability

Answer 48

1. removing legal barriers (eg Royal Mail was privatised) 2. forcing Force firms to allow competitors to use its network For example when BT was privatised, OFTEL forced BT to allow other companies to use its network.

Question 49

example of a market with low contestability

Answer 49

1. walking tourist tours 2. home to home hair dresser 3. grass cutter