Evaluating perfect competition and monopoly

producer sovereignty

Consumer sovereignty and producer sovereignty: A monopoly, by contrast, may enjoy .................

consumer sovereignty - in the sense that the goods and services produced are those that consumers have voted for when spending their money

Consumer sovereignty and producer sovereignty: Arguably, perfect competition has the advantage of promoting what? In what sense?

Marketing devices such as persuasive advertising

Consumer sovereignty and producer sovereignty: Producer sovereignty may not be exercised on a 'take it or leave it' basis, but the monopolist may still possess sufficient market power to manipulate consumer wants through what devices?

All the firms in a particular market would sell identical goods at an identical price, namely the ruling market price

Consumer sovereignty and producer sovereignty: The extent to which consumer choice would exist in a perfectly competitive world is extremely limited. Why?

determined by the monopolist rather than by consumer preferences expressed in the market price

Consumer sovereignty and producer sovereignty: The goods and services available for consumers to buy in a monopoly are determined by what rather than what?

those that produce goods other than those for which consumers are prepared to pay

Consumer sovereignty and producer sovereignty: which firms do not survive in perfect competition?

reduces consumer surplus and welfare

Evaluating perfect competition and monopoly in terms of economic welfare: Higher prices have what affect on consumer surplus and welfare?

loss in consumer surplus producer surplus (in the form of monopoly profit) increases at the expense of consumer surplus

Evaluating perfect competition and monopoly in terms of economic welfare: If a monopoly raises the price from p1 to p2, what happens to consumer surplus? Shown on diagram? What does this mean for producer surplus?

the fact that the amount bought and sold falls to Q2

Evaluating perfect competition and monopoly in terms of economic welfare: Over and above this transfer, there is a net loss in economic welfare caused by what?

difference between minimum price a firm is prepared to charge for a good and the actual price charged

Evaluating perfect competition and monopoly in terms of economic welfare: Producer surplus is the difference between what and what?

- the argument against monopoly - compared to perfect competition, monopoly restricts output to Q2 and raises price to P2

Evaluating perfect competition and monopoly in terms of economic welfare: The diagram supports what argument and why?

- two shaded triangles - depicts the loss of consumer surplus and the loss of producer surplus

Evaluating perfect competition and monopoly in terms of economic welfare: The welfare loss or deadweight loss is shown by what on the diagram? What does this respectively depict?

At point B where MR=MC

Evaluating perfect competition and monopoly in terms of economic welfare: Where on the diagram is monopoly equilibrium determined?

human happiness or utility

Evaluating perfect competition and monopoly in terms of economic welfare: define economic welfare

a measure of the economic welfare enjoyed by firms or producers: the difference between the price a firm succeeds in charging and the minimum price it would be prepared to accept

Evaluating perfect competition and monopoly in terms of economic welfare: define producer surplus

market supply

Evaluating perfect competition and monopoly in terms of economic welfare: the marginal cost curve in monopoly is the same curve as ............ in perfect competition)

- price competition - in the form of price wars or price-cutting by individual firms

How competitive is perfect competition: What wouldn't take place by in a perfectly competitive market economy?

Apply efficiency concepts (productive efficiency, X-efficiency, allocative efficiency, static efficiency, dynamic efficiency) - ask how perfect competition and monopoly affect the consumer surplus and producer surplus that households and firms respectively enjoy, and hence the effect on general economic welfare

How do economists evaluate perfect competition and monopoly?

by the extent to which the price of the product is above the marginal cost

Microsoft's pricing policy, allocative efficiency and resource allocation: Economist's often judge the monopoly power of a firm by what?

monopoly power

Microsoft's pricing policy, allocative efficiency and resource allocation: The greater the gap between marginal cost of production and price, the greater the ..............

0 - so that Microsoft can recover the very significant development cost of windows

Microsoft's pricing policy, allocative efficiency and resource allocation: The marginal cost of producing and supplying one extra copy of windows is very close to what? Why must the price charged be higher?

- economic inefficiency - resource misallocation

Microsoft's pricing policy, allocative efficiency and resource allocation: When prices exceed marginal costs, what two things also occur?

Organisational slack

Monopoly and economic efficiency: As a result, the absence or weakness of competitive forces means there is no mechanism in monopoly to remove what?

- low - high

Monopoly and economic efficiency: Compared to perfect competition, a monopoly produces too ...... an output which it sells at too ..... a price

eliminate supernormal profits

Monopoly and economic efficiency: Competitive pressures serve to eliminate what in perfectly competitive markets?

- refer to sheet

Monopoly and economic efficiency: Draw a revenue and cost diagram showing a monopoly that is productively inefficient and allocatively inefficient, and therefore likely to be X inefficient

Both allocatively and productively inefficient

Monopoly and economic efficiency: In contrast to perfect competition, assuming an absence of economies of scale - monopoly equilibrium is what in terms of efficiency?

X-inefficient - incurring average costs at a point such as X which is above the average cost curve (refer to diagram)

Monopoly and economic efficiency: The absence of competitive pressures in a monopoly means that it is likely to be ...... inefficient. Explain

- Q1 - average costs are above the minimum level - P>MC

Monopoly and economic efficiency: The diagram shows that the profit maximizing level is located where? What are the average costs like in relation to the minimum level? What is price and MC like?

Due to barriers of entry which protect monopolies.

Monopoly and economic efficiency: Why may a monopoly be able to survive, perfectly happy incurring unnecessary production costs and making satisfactory rather than maximum profits?

- refer to sheet

Natural monopoly and economies of scale: Draw a diagram of LRAC and STATC cost curves showing a justification of monopoly when economies of scale are possible

- Monopoly may exhibit some degree of productive inefficiency if it produces above the lowest point on SRATCn. - However, all points on SRATCn incur lower unit costs, and are productively more efficient than any point on SRATC1 - the SRATC curve is the relevant curve for each firm if the monopoly were to be broken into a number of smaller competitive enterprises

Natural monopoly and economies of scale: Explain the diagram justifying monopoly when economies of scale are possible

limited market size

Natural monopoly and economies of scale: In a natural monopoly, why is there insufficient room in the market for more than one firm benefiting from full economies of scale?

X

Natural monopoly and economies of scale: Monopoly is also likely to be ... inefficient

the assumption that there are no economies of scale

Natural monopoly and economies of scale: The conclusion that perfect competition Is productively more efficient than monopoly depends on what assumption>

productively and allocatively efficient, neither

Natural monopoly and economies of scale: We can conclude that perfect competition is both .......... and ............ efficient whereas monopoly is ..........

monopoly

Natural monopoly and economies of scale: When substantial economies of scale are possible in an industry, which market structure may be more productively efficient?

involves minimizing the average costs of production

Productive efficiency or cost efficiency: define productive efficiency

- refer to sheet

Productive efficiency or cost efficiency: draw a PPF showing productive and technical efficiency

- refer to sheet

Productive efficiency or cost efficiency: draw a diagram showing short-run and long-run productive efficiency

- It is impossible for the firm to produce Q1 at a level of unit costs or average costs below C1 unless the cost curve shifts downward over time - if factors of production are combined in a TECHNICALLY INEFFICIENT way, unit costs greater than C1 would be incurred when producing output Q1. - firm would be producing off its cost curve at a point such as X, at which average costs are greater - Any point above the cost curve is X-inefficient

X-efficiency: Explain the short-run average cost curve showing X inefficiency

Argued that monopolies are always technically and productively inefficient because of organizational slack, resulting from the lack of competitive pressures.

X-efficiency: In the 1960s, the economist Harvey Liebenstein argued what about monopolies and efficiency?

- a firm may be technically inefficient (employing too many workers, investing in machines it never uses) - firm paying its workers or managers unnecessarily high wages or salaries, or buying raw materials or capital at unnecessarily high prices

X-efficiency: What are the main causes of X-inefficiency?

All points on the cost curve (including the productively efficient point where unit cost is lowest)

X-efficiency: Which points are X-efficient?

the lowest possible prices

X-efficiency: X-efficiency requires what price to be paid for inputs or factors of production

Occurs when it is impossible to improve overall economic welfare by reallocating resources between industries or markets (assuming an initial distribution of income and wealth.

Allocative efficiency: Define

price must equal marginal cost in each and every market in the economy

Allocative efficiency: Define for the whole economy

If and when resources are reallocated from markets where P < MC into those where P > MC until allocative efficiency is achieved when P=MC in all markets

Allocative efficiency: For any given employment of resources and any initial distribution of income and wealth amongst the population, when can total consumer welfare increase?

the value is less than the marginal cost of the resources used to produce the last unit. - encourages too much consumption - at this price the good is over-produced and over-consumed

Allocative efficiency: In markets in which P < MC, what is the value placed on the last unit consumed by households? The price is too low and encourages too much of what? At this price, what can we assume about the good?

Pay a price for the last unit consumed which is greater than the cost of producing the last unit of the good - discourages consumption - the good is under-produced and under-consumed

Allocative efficiency: In the markets where p > mc, what do households pay? High prices discourage what? So what do we conclude about this good at this price?

The good's opportunity cost in production. The value of resources which go into the production of the last unit, in their best alternative uses.

Allocative efficiency: Marginal cost measures what?

take resources from the group of markets where p < mc and reallocate to the former group where p > mc. - Total consumer welfare and utility should increase - prices will fall in the markets where p < mc where resources have been shifted out - prices will increase in the markets where p > mc because resources are being shifted into the market - As these prices adjust, p equals MC in all markets simulatenously. - Beyond the point at which P=MC in all markets, no further allocation of resources can improve consumer welfare (assuming other factors such as distribution of income remain unchanged)

Allocative efficiency: Taking both types of markets, how could we reach an outcome in which P=MC in all markets?

a measure of the value in consumption placed by buyers on the last unit consumed. - It indicates the utility or welfare obtained at the margin in consumption

Allocative efficiency: The price of a good (p) is a measure of what? What does it indicate?

- those where P > MC - those where P < MC

Allocative efficiency: We may suppose that all the economy's markets divide into what two categories?

Where P>MC or P<MC

Allocative efficiency: When does allocative inefficiency occur?

P = mc in all industries and markets in the economy

Allocative efficiency: it occurs when price equals what?

other firms can free-ride and gain costless access to the results of any successful research

Dynamic efficiency in monopoly: In perfect competition, why is there little to no incentive to innovate?

the use of patent legislation - grants a firm he right to exploit the monopoly position created by innovation for a number of years before the patent expires

Dynamic efficiency in monopoly: The argument about monopolies and free-riding justifies what? Explain

- protected by entry barriers, a monopoly earns profit without facing the threat that the profit disappears when new firms enter the market - allows an innovating monopoly to enjoy, in the form of monopoly profit, the fruits of success of R&D and product development

Dynamic efficiency in monopoly: Under certain circumstances, why may monopolies be more dynamically efficient than perfectly competitive firms?

They reduce rather than promote innovation and dynamic efficiency - protected from competitive pressures, a monopoly may profit-satisfice rather than profit-maximize because it becomes content with satisfactory profits and an 'easy life'

Dynamic efficiency in monopoly: What is the counter-argument about monopolies?

measures the extent to which various forms of static efficiency improve over time

Dynamic efficiency: Define

the introduction of better methods of producing existing products, including firms' ability to benefit more from economies of scale and also from developing and marketing completely new products

Dynamic efficiency: Improvements in dynamic efficiency result from what?

Invention refers to advancements in pure science whilst innovation is the application of scientific developments to production

Dynamic efficiency: Invention refers to what in contrast to innovation?

- invention - innovation - R&D

Dynamic efficiency: What main 3 factors improve dynamic efficiency? (Rii)

measures technical, productive, X and allocative efficiency at a particular point in time

Dynamic efficiency: define static efficiency

achieves the economic agent's desired objective at the minimum cost to the agent itself and the minimum undesired side effects

Economic efficiency: In terms of private self-interest, any decision made by an individual, a firm or government is economically efficient if it achieves what?

the social costs incurred and the social benefits received

Economic efficiency: In terms of the whole community, what factors need to be considered in our definition of economically efficient?

assess the extent to which the market structure is efficient or inefficient

Economic efficiency: To judge the contribution of a market structure to human welfare, we must assess what?

improving human wellbeing (remembering that perfect competition is an abstract and unreal market structure)

Economic efficiency: Within a market economy, perfect competition and monopoly must be judged on the extent to which they contribute to what?

in general terms, economic efficiency minimizes costs incurred, with minimum undesired side effects

Economic efficiency: define

between the maximum price a consumer is prepared to pay and the actual price they need to pay

Evaluating perfect competition and monopoly in terms of economic welfare: Consumer surplus is the difference between what and what?

- increases - market prices fall

Evaluating perfect competition and monopoly in terms of economic welfare: Consumer welfare increases whenever consumer surplus ........... Give an example

a measure of the economic welfare enjoyed by consumers: surplus utility received over and above the price paid for a good

Evaluating perfect competition and monopoly in terms of economic welfare: Define consumer surplus

- refer to sheet

Evaluating perfect competition and monopoly in terms of economic welfare: Draw a diagram showing consumer surplus and producer surplus in a competitive market

- refer to sheet

Evaluating perfect competition and monopoly in terms of economic welfare: Draw a diagram showing how the formation of a monopoly results in a loss of economic welfare (MR, AR, MC)

a long run concept

Productive efficiency or cost efficiency: True productive efficiency is what concept?

no economies of scale

Perfect competition and economic efficiency: A perfectly competitive firm achieves both competitive and allocative efficiency in the long run provided there are no what?

- refer to sheet

Perfect competition and economic efficiency: Draw a diagram showing the long-run equilibrium of a perfectly competitive firm which is productively, allocatively and X-efficient

- in a perfectly competitive market, to make normal profits a firm has to eliminate organizational slack or X ineffiency - A firm is X-inefficient when it is producing at a level of unit costs above its ATC curve a firm and therefore cannot make normal profits in the long run.

Perfect competition and economic efficiency: In long-run or true equilibrium, why must a perfectly competitive firm also be X-efficient?

because p=mc - if all markets are perfectly competitive and in the long run equilibrium - every firm is producing where P=MC

Perfect competition and economic efficiency: Why is the firm allocatively efficient in the long run? The firm is allocatively efficient only if all markets in the economy are what?

it produces the optimum output at the lowest point on its ATC curve

Perfect competition and economic efficiency: Why is the firm productively efficient in the long run?

the lowest unit cost of producing different levels of output at all the different possible scales of production

Productive efficiency or cost efficiency: A firm's long-run average cost curve shows what?

producing on the economy's PPF

Productive efficiency or cost efficiency: Define productive efficiency for the economy as a whole

- refer to sheet

Productive efficiency or cost efficiency: Draw a diagram showing productive efficiency in the short run

the lowest point on the relevant short-run average total cost curve

Productive efficiency or cost efficiency: In the short run, what locates the most productively efficient level of output for the particular scale of operation?

points on the PPF - it is only possible to increase output of capital goods by reducing output of consumer goods

Productive efficiency or cost efficiency: On a PPF, which points are productively efficient? Why?

a point inside the frontier is productively and technically inefficient - output of capital goods could be increased by using inputs in a more technically efficient way without reducing output of consumer goods.

Productive efficiency or cost efficiency: On a PPF, which points are productively inefficient? Why?

the lowest point

Productive efficiency or cost efficiency: The most productively efficient of all the levels of output occurs where on a firm's long average cost curve?

use the techniques and factors of production available at the lowest cost per unit of production

Productive efficiency or cost efficiency: To achieve productive efficiency what must a firm do?

minimizes the inputs of capital and labour needed to produce that level of output

Technical efficiency: At any level of output, production is technically efficient if it does what?

maximizes output from the available inputs

Technical efficiency: define

everyone is motivated by self-interest alone

Why firms like to be monopolies: Economic theory assumes what about everyone?

perfect competition

Why firms like to be monopolies: Economists generally desire what market structure?

eliminating competition and becoming a monopoly

Why firms like to be monopolies: From a firm's point of few, what may successful competition actually be?

- market forces (the invisible hand of the market referred by Adam Smith) - absence of barriers to entry and exit

Why firms like to be monopolies: In perfect markets, what factors prevent firms eliminating competition and becoming monopolies?

- economic efficiency - welfare maximization - consumer sovereignty

Why firms like to be monopolies: State some desirable functions of perfect competition

the assumptions that businesspeople in competitive industries are more highly motivated or public-spirited than monopolists

Why firms like to be monopolies: The desirable properties of perfect competition do not result from what assumptions?

Market forces

Why firms like to be monopolies: Ultimately, consumers benefit from lower prices brought about by technical progress and the forces of competition. Therefore, it is not some socially benign motive or public spirit assumed to be part of entrepreneurs that accounts for the optimality of perfect competition as a market structure, but is in fact what?

Occurs whenever, for the level of output it is producing, the firm incurs unnecessary production costs (if the firm wished, it could reduce its costs)

X-efficiency: Define X inefficiency

- refer to sheet

X-efficiency: Draw a short-run average cost cuve showing X inefficiency occurring when a firm incurs unnecessary costs