1
Q
what are the 6 characteristics of perfect competition
A
- many small firms
- homogenous products(perfect substitutes)
- no market power(firms are price takers)
- no barriers to entry or exit
- perfect information
- perfect factor mobility
2
Q
explain why firms have no market power
A
- there are many buyers and sellers in perfect competition
- no one firm is large enough to affect the market
3
Q
explain why in PC the products are homogenous(perfect substitution)
A
- firms produce identical products and one firms product is just as good as another
- hence, there is no incentive to advertise as it would only increase costs(the exception being industry-wide advertising)
- furthermore, one firms product is a perfect substitute for another. as such, the demand curve faced by a firm is perfectly price elastic
4
Q
explain why in PC there are no barriers to entry or exit
A
- firms can enter and leave the industry at will, without costs
- as a result, due to market forces, firms will always earn normal profit in the long run
5
Q
explain why in PC there is perfect information
A
- potential and existing producers have perfect information on the costs and revenues of producers
- buyers are aware about the industry and that products are homogenous
6
Q
explain why in PC there is perfect factor mobility
A
- factors of production can be moved in and out of production freely
7
Q
why is demand curve in PC perfectly elastic
A
because firms have no market power
8
Q
explain how PC moves from short run to the long run
A
- the SN profit acts as an incentive for firms to join the market - market supply then increases(explain price mechanism), so market price decreases. as firms are price takers, firms price also decrease. firms will keep joining the market and market price will keep decreasing until the SN profit made by individual firm is normal profit. the market is now in the long run, when firms leave due to subnormal profit/loss - this is the shutdown condition
9
Q
benefits of perfect competition
A
- low prices for consumers
- competition leads to the closing down of inefficient producers
- market responds to consumer tastes
- market responds to changes in technologies or resources prices
10
Q
drawbacks of perfect competition
A
- unrealistic assumptions
limited possibilities to take advantage of EOS - lack of product variety
- limited ability to engage in R&D
11
Q
what are the characteristics of monopolstic competition
A
- many firms
- slightly differentiated products
- insignificant market power(some price-setting power)
- insignificantbbarrierts to entry or exit
- imperfect(close) substitutes exist
12
Q
explain the many firms of MC
A
- there are many buyers and sellers in MC
- firms are small to medium in size
13
Q
explain how in MC slightly differentiated products, imperfect(close) substitutes exist
A
- firms produce similar products that are imperfect - or close - substitutes
- due to a slight level of product differentiation, there is a small incentive to advertise
14
Q
explain why in MC firms have insignificant market power(some price setting power)
A
- due to subtle product differentiation, firms will hold some market power
- however, as substitutes are close in monopolistic competition, the demand curve faced by a firm is relatively price elastic. hence, firms have less freedom to control prices without experiencing large changes in quantity demanded
15
Q
explain why in MC there are insignificant barriers to entry or exit
A
- there are low levels of barriers to entry, although they are insignificant
- as result due to market forces firms will always earn normal profit in the long run
16
Q
explain the movement from SR to LR in monopolistic comp
A
- short run SN profit incentivises firms to join the market. as more firms join the market, competition increases(they cannot compete on non-price factors as goods are only slightly differentiated) so prices go down = AR(Demand). therefore, difference between AC and AR goes down so supernormal profit decreases. firms will continue to join the market and prices competed down until all superonaml profit is eroded away and only normal profit can be made
17
Q
what is a monopoly the opposite of
A
- perfect competition
18
Q
what are the characteristics of a monoply
A
- single or dominant firm
- dominant price(price makers)
- high barriers to entry(artificial or natural)
- no close substitutes
19
Q
explain in monopoly there is only one single or dominant firm
A
- a firm can be considered a monopolist if it has significant market share and is much larger than other firms in the market
20
Q
explain in a monopoly why they have dominant power(price makers), and no close substitutes
A
- products in a monopoly are unique and there are no close substitutes
- as a result, demand is relatively price ineslatic and monopolists have the power to affect market prices by themselves
- high degrees of market power allows them to make high levels of profits
21
Q
explain why there are high barriers to entry in monopoly market
A
- monopolists can earn supernormal profit in LR because of high barriers to entry
- natural barriers to entry include
- artificial barriers to entry
22
Q
give three examples of natural barriers to entry in monopoly market
A
- ownership of key FOP
- Econ of scale
- natural monopoly
23
Q
what are some artificial barriers to entry
A
- advertising
- patents
- high cost of switching for the consumer
24
Q
why is there welfare losses in monopoly market
A
- a loss in CS due to higher prices
- a loss in PS due to restricted output
25
give some characteristics of an oligopoly
- two or more large firms
- firms decisions are mutually interdependent
- significant barriers to entry
26
explain why there are two or more large fits in non-collude oligopoly
- there are a few large firms that are in direct competition
27
explain why in oligopoly market the firms pricing decisions are interdependent
- firms are mutually interdependent, meaning they consider each others behaviours and decisions to develop pricing and non pricing strategies
- firms may engage in price wars, where they attempt to steal demand from each other by lowering their prices
28
explain why there are significant barriers to entry to oligopoly market
- there are significant natural and artificial barriers to entry, preventing new entrants
29
what is a concentration ratio in oligopoly market and what will it be in this market
- CR measures the sum of market share held by the largest firms in the industry
- an oligopoly market will have a high concentration ratio
30
what is concentration of CR4 in global smartphone market
- CR4 = 73.4%
31
what is non price competition in oligopoly market
- due to mutual interdepence, oligopolists often engage in non price comp instead
32
what are some examples of non-price comp
- advertising
- innovation
- quality of products and/or services
- after sales service
33
what is collusion in oligopoly market
- collusion is an agreement between oligopolists to fix prices, collectively limit output, and to create artificial barriers to entry. this incentive to collude is engendered by the potential to earn supernormal profits. when firms in oligopoly market collude they act as a monopoly
34
what is an example of collusive oligopoly
- organisation of petroleum exporting countries(OPEC), where members collectively limit the world supply of oil to maintain high prices and SN profits
35
what is the real world example about Phoebus cartel
- the phoebes cartel was an oligopoly that controlled the market of light bulbs. the organisation appropriated market segments by location and deliberately lowered the lifespan of their products
36
what are the advantages of firms having significant market power
- while perfect competition is the most efficient market structure., there are benefits to large firms
- Econ of scale - internal and external
- innovation - process innovation and R&D
37
define EOS
- as production increases, the long run average costs of production fall as fixed costs are spread over a large range of units.
38
what are four examples of internal EOS
- specialisation
- efficiency
- marketing
- purchasing
39
what are four examples of external economies of scale
- lower recruitment costs
- ancillary services
40
explain how innovation is a benefit of large firms having significant market power
- large firms with significant market power are able to earn supernormal profits, which can be invested into research and development(R&D)
- process innovation includes innovations in production that allow for the more efficient production of goods and services
- product innovation drives new products which offer greater consumer choice
41
what are the alternative objectives of firms
- revenue maximisation(MR=0)
- growth
- social benefit
- environmental benefit
- satisficing( a perceived equitable combination of the above)
-basciallt, firms do not necessarily produce at the quantity where MC=MR
42
what is the result of lower competition in a market allows firms to control
- market supply(output)
- market prices
- consumer choice
43
explain how firms dominating market supply is a bad thing
- under the supply of the Pmax, firms will always produce where mc = mr
- this is allocatively inefficient(P=mc), leading to an under provision and underconsumption of a product, creating a welfare loss
44
explain the risk in markets when firms dominate the market prices
- owing to the law of demand, restricted output will also lead to higher market prices, consumer surplus
- as large firms have enough power to manipulate market prices, a contestable monopolist may lower prices to increase barriers to entry as a form of anticompetitive behaviour
45
explain the risks in firms dominating consumer choice
- despite supernormal profits allowing firms to invest in R&D, a lack of competition lowers the incentive for large firms to innovate
- furthermore, with few large larger as opposed to smaller firms, consumers have less options to choose from
46
what are the gov responses to absuses of Market power
- legislation and regulation
- government ownership
- fines
market power
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