Perfect Competition, imperfectly competitive markets and monoploy

what are satificers?

examine only a limited set of alternatives and choose the best between them in order to set a minimum acceptable level of achievement

What are the long run benefits which are likely to result from competition

firms are more likely to be more productively and allocatively efficiency. This is because they can provide the goods and services that consumers want, and competitive pressure forces them to lower the cost of production.

What are the short run benefits which are likely to result from competition?

firms may make supernormal profit, which can be reinvested back into the firm. This can increase dynamic efficiency and lower LRAC.

why is it assumed that in the long run, all firms will have the same cost curve in a perfectly competitive market

firms will have access to the same factors of production and will have perfect knowledge and so if they are aware of any competitors that have lower cost, they will try to meet it.

why may market share be an alternative objective for a firm?

growth in market share may be a sign that the firm is doing well at the expense of competitors. This may approximate to high profits and that the firm is doing well.

How does changes in supply affect consumer surplus

high supply costs leads to a rise in market prices and therefore a fall in consumer surplus. The opposite happens for the decrease in supply

What is dynamic efficiency

occurs when businesses supplying a market successfully meet our changing needs and wants over time.

why is x efficiency achieved in perfect competition

perfectly competitive firms are producing on the average cost curve at the long run equilibrium output level. In this sense firms are minimalising their unit costs implying their is no wasting production. - For highly competitive firms, being x efficient is crucial to charge the lowest prices for consumers increasing their consumer surplus - for the producer, lower average cost can lead to higher levels of supernormal profit overtime and also increases in market share if lower prices are charged compared to rival firms. perfectly competitive firms must be x efficient otherwise they will lose market share to rivals who are doing so.

What is producer surplus?

the difference between the price producers are willing and able to supply a product for and the price they get in the market.

What is Schumpeter's creative destruction theory?

the idea that new entrepreneurs are innovative, which challenges existing firms in the market. The more productive firms then grow, whilst the least productive are forced the market. This results in an expansion of the economy's productive potential.

What is monopolistic competition

there are many producers and many consumers within the market

Why are cartels x inefficient

they can become complacent or even lazy in the production process allowing waste.

how can the principal agent problem be overcome?

various strategies can be done to try and alligh the aims of two different stakeholders: - Employee share ownership schemes e.g. John Lewis and Waitrose. - Long term employment contracts for senior management: security of tenure might encourage managers to take decisions in the long term best interests of the business.

What is formal Collusion and how does it lead to a cartel

when firms make agreements between themselves to limit competition. When the agreement is wide reaching and many firms are involved it becomes a cartel

when is a firm productively efficient

when it is operating at the lowest point on its average cost curve, i.e. when uni cost have been minimised .

What are the disadvantages of price discrimination?

- Ultimately price is still set above market price in all groups which means its allocatively inefficient. This means that consumer choice is restricted and prices are raised, reducing consumer surplus. - Firms who use 3rd degree price discrimination may use supernormal profit from inelastic market to enable the elastic market to be prices below costs to push out competition. This therefore increases barriers to entry into the market - Income inequality could worsen as if those paying higher prices are also low income families their disposable income is reduced further.

what is the neo-classical assumption about short run profit maximisation

- a firm maximises its profits in the short run by looking to seek output where MC=MR. - In market where there is heavy branding, prices are likely to be stable however in commodity industries where firms are producing homogenous products then prices are likely to be unstable. - In the short run, firms will continue to operate as long as they are covering their variable costs and making a contribution to their fixed costs. however in the long run they must cover all costs to keep operating.

what are some evaluation points on monopolistic competition

- although firms appear allocatively inefficient, consumers gain satisfaction because they ate willing to pay a slightly higher price than MC for a product with some variety and greater choice - It is difficult for firms to gain productive efficiency due to the consumer demand for differentiated goods. The variety of goods makes it hard to reach EOS. - although they are not making supernormal profit, it does not mean that firms will not be forces to reinvest short run profits or even normal profits to help them keep ahead of competition. - Monopolistic competition is the best market structure for maximising social welfare as the firms are meeting needs and wants in the market and are focused on profit maximisation.

Explain how monopolists are profit maximisers in the short run and long run

- assuming that firms are short run profit maximisers, the firm will produce at the level of output where marginal cost equals marginal revenue. The firms marginal cost curve cuts the marginal revenue curve at a level output where average revenue is greater than average cost and so the firm will make abnormal profit. - In the long run, the barriers to entry prevent other firms from entering to try and gain a share of the profit so the abnormal profit is sustained.

What are the benefits of oligopolies/cartels

- cartels can be dynamically efficient, - even though they are productively inefficient that may still be exploiting greater economies if scale that smaller competitive firms - if oligopolies behave competitively, outcomes can be like those attained by competitive markets. allocative efficiency can be achieved if price does not move close or equal to marginal cost.

what are some examples of homogenous products

- cement - wheat - sporting bets - flowers - fruit in a big street market - bars in spanish resorts

Are barriers to entry coming down?

- growth of businesses preparers to use disruptive pricing models - many firms can lease rather than buying equipment/retail space which reduces start up costs - vital marketing via social media can cut costs of attracting sales - increased availability of open source software+ sales platform

explain the long run and short run shut down poiints

- if the firm is making a loss in the short run, production won't necessarily shut down production. A firm has fixed costs which it has to pay whether it closed down and produces nothing or is operating at full capacity. Any revenue over and above variable cost will make some contribution towards paying its fixed costs. Therefore it will only close down if average revenue or price is below average variable cost - in the long run, there are no fixed costs and the average total cost and average variable cost curves are one and the same. The firm will not produce unless it can cover all its costs.

why may firms decide to sales maximise

- increase market share - like Rev max it can be used to measure the size of a firm and managers and directors can justify their rewards they take from the firm by pointing to the sales they have achieved.

What is third degree price discrimination

Charging different prices o groups of consumers segmented by the price elasticity of demand, income, age, sex

Why do firms in a contestable market choose operate where AC=AR

Contestable firms cannot maintain quantity and price producing output that generate maximum profit as supernormal profit leads to a higher risk of entry into the market from new firms. As such they operate where AC=AR as they are making normal profit but the incentie for new firms to enter is removes.

why are the disadvantages of having a market with perfect competition

Dynamic efficiency is not achieved product homogenity is not in best interests reduce quality of good or service as a result of trying to reduce costs

How does creative destruction work?

If firms have monopoly power and they are making large profits, new firms have an incentive to enter the market and innovate, to overcome barriers to entry.

what is long run profit maximisation

Neo Keynesian economists believe that firms seek to maximise profits in the long run. In order to profit maximise in the short run there would be many adjustments to price of the product to respond to changes in the market. - Neo Keynesian believe that many changes in price is not good for the image of the firm and product and prefer to have more stability in their price levels. this may mean that the firm will produce in the short run even if they do not cover their variable costs. The firm takes a more long term view and will take short term losses for long term gains.

How does third degree price discrimination work?

The seller would identify that the groups would have a different willingness and ability to buy (PED) and as a result it will charge a higher price to the group with a more inelastic PED and a lower price to the group with a more elastic PED. As such is it will choose the price based on each groups individual average revenue curve and set price and output at the profit maximising point.

what are barriers to entry and exit like in a market with perfect competition

There is freedom to entry and to exit from the industry. Firms must be able to establish themselves in the industry quickly and easily. Barriers to entry must therefore be low, if a firm wished to cease production and leave the market, it must be free to do so

what is monopolistic competition

a market structure in which many companies sell products that are similar but not identical

What is a pure monopolists

a single supplier dominates the entire market

why are firms in a monopolistic competition market allocatively in-efficient

as P>MC at the profit maximising output., this means that resources are not allocated according to consumer demand, they are recieving a lower quantity than they desire. Consumer choice is limited and prices are high, this reduces consumer surplus.

why are firms in a monopolistic competition productively in-efficient

as they are not producing at the lowest point on their AC and the profit maximising level output limits output it reduces their productive efficiency as economies of scale are not exploited

why can firms in a market with perfect competition make supernormal profit in the short run

assuming that firms are short run profit maximisers, the firm will produce at the level of output where marginal cost equals marginal revenue. The firms marginal cost curve cuts the marginal revenue curve at a level output where average revenue is greater than average cost and so the firm will make abnormal profit.

Why do oligopolies tend to be both allocatively and productively inefficient

At the profit maximising equilibrium, Price is above marginal cost and output is less than the productively efficient output

What are the drawbacks of monopolies

- Not allocatively efficient - X inefficient - They risk growing to big and suffering from diseconomies of scale.

What is an Oligopoly

A market structure in which a few large firms dominate a market

Why may monopoly power lead to consumers being exploited

They could be charged high prices, because consumers have little choice where to purchase their goods and services, since there are so few firms in the market. Consumer surplus falls.

What is perfect competition?

describes a market where there is a high degree of perfect competition.

What are the pro's of a contestable market

- Allocative efficiency can be achieved as firms are forces to reduce their price and increase their quantity. Consumer choice is higher and price are low, increasing consumer surplus. - Productive efficiency can be achieved. Production is likely to be high so the increase in output moves the firm further along the AC curve towards the lowest point. This leads to great exploitation of economies of scale which lowers AC and leads to lower prices.

what are the advantages of having a market with perfect competition

- Allocative efficiency is achieved in the long run. - Productive efficiency achieved in the long run] - X efficiency is being achieved

What are the conditions in order for a cartel to work effectively

- An agreement has to be reached. The larger the number of firms, the greater the possibility that at least one participant will refuse to collude. - cheating has to be prevented. If one firm cheats without any other firm doing the same they will benefit from the high price and higher output. However if everyone did this the market price would fall and supernormal profit would be lost. - Potential Competition must be restricted as they will be attracted to the supernormal profit

What are the sources of monopoly power

- Barriers to entry: Monopolies are protected by barriers to entry such as legal barriers, sunk costs, set up costs - Economies of scale: As firms grow larger, the average cost of production. falls because of economies of scale. This means existing large firms have a cost advantage over new entrants to the market, which maintains their monopoly power. - Limit Pricing: this involves the existing firm setting the price of their good below the production cost of new entrants - The number of competitors: the fewer the number of firms, the lower the barriers to entry and the harder it is to gain market share - Advertising: can increase consumer loyalty, making demand price inelastic, and creating a barrier to entry - The degree of product differentiation: the more the product can be differentiated, through quality, pricing and branding, the easier it is to gain market share.

What are some examples of barriers to entry relating to costs

- Capital Costs: if start up costs are high, then i will be harder for new firms to enter the market - Sunk costs: these are costs that are non-recoverable if/when the firm ceases to operate e.g. advertising. If sunk costs are high it will deter firms from entering the market as they are not prepared to take the risk. - Economies of scale: if a few large firms are operating at the lowest point on their average cost curve they will be able to satisfy all the demand in the market. This will make it more challenging for new firms to enter the market as they would not be able to take advantage of economies of scale and as a result will have higher average costs.

What are the drawbacks of oligopolies/cartels

- Cartels produce outcomes that are allocatively inefficient - Cartels are productively inefficient - Cartels are usually X inefficient

what is the assumption about what consumers, workers and firms seek to maximise?

- Consumers seek to maximise utility - Workers like to maximise reward - firms like to maximise profit.

What are some examples of potential conflictss between stakeholders

- Cutting jobs to reduce costs may be supported by shareholders and banks but opposed by employees and local communities. - Adding extra shifts to increase factory capacity may be be supported by management and customers and supplies but opposed by the local community. - introducing new machinery to replace manual work may be supported by customers and shareholders but opposed by employees - Increasing selling price significantly to improve profit margins may be supported by shareholders and management but opposed by customers.

What are the cons of a contestable market

- Dynamic efficiency is less likely to be achieved due to normal profit being achieved so there is less profit to reinvest into the business. Overtime consumers are worse off due to little advancements in technology - risk of hit and run competition may prevent a firm from expanding and making a large supernormal profit. This means economies of scale are not exploited fully - pressure on price may reduce quality of the product - contestable markets can lead to creative destructon

What are some of the advantages of price discrimination

- Dynamic efficiency is possible as firms can reinvest the supernormal profit. As well as benefits for the consumer the monopoly can gain monopoly power due to innovations and better technology. - Firms could use third-degree price discrimination to charge those in low/middle-income countries a fairly low price for essential goods such as pharmaceuticals. They can then cross-subsidies this loss of profit by charging higher prices for those in high-income countries. - If price discrimination means total output can be increased, it can allow the firm to further exploit greater economies of scale - it can bring new consumer into the market who otherwise may have been previously excluded due to the single high price. - Charging lower prices during the off-peak time to encourage more ticket sales makes better use of spare capacity which can have environmental benefits/less waste.

why do many cartels break down?

- Enforcement problems: the cartel aims to restrict production to maximise total profits, but each individual seller finds it profitable to expand their production - Other firms who are not members of the cartel may opt to take a free ride by selling just under the cartel price. - Falling market demand creates excess capacity in the industry and puts pressure on profits and cashflow. - The exposure of price fixing by whistle blowing firma.

What are the Characteristics of a Oligopoly Market

- Few large firms dominating the market - High Concentration Ratio, around 70% - The Goods and Services produced are differentiated. - High Barriers to entry and exit for firms - Interdependence - As prices are sticky there is lots of non-price competition e.g. branding and quality

What are the necessary conditions for price discrimination

- Firms must have sufficient monopoly (market power) - Be able to identify different market segments: i.e groups of consumer with different PED's - Ability to separate groups: this requires information/sufficient market intelligence on purchasing behaviour of consumers - Ability to prevent re-sale (arbitrage): so secondary markets where arbitrage can take place at intermediate prices so requirers limiting sales, age restrictions, ID cards

What are the disadvantages of Oligopolies

- High Concentration reduces consumer choice - Cartel like behaviour reduces competition and can lead to higher prices and reduced output - firms can be prevented from entering a market because of deliberate barriers to entry - Potential loss of economic welfare - Oligopolies may be allocatively and productively inefficient

What are som evaluation points for monopolies

- If monopolies are effectively regulated they will be able to function more efficiently than theory may suggest. Through different techniques such as price controls and forced investment they may be able to get closer to allocative efficiency - They may have the potential to be dynamically efficient but this depends on the firm's profits being reinvested into the business rather than paid out in the form of dividends. - Profit maximisation is an assumption but not a definite objective for all monopolies e.g. sales or rev max.

what factors promote cartels

- If there is a small number of firms in the industry: this makes it easier to organise agreements to fix prices or quantities to make supernormal profit. It is also easier for firms to stay in contact with one another reducing the risk of cheating - if firms have similar costs to each other it is easier to agree on price or quantity to fix thus making cartel agreements simpler to facilitate and maintain over time. - If barriers to entry are high the supernormal profits will be more protected and sustained in the long run. - if competition policy is ineffective perhaps due to weak enforcement by regulatory bodies in a given industry, cartel agreements can form, firms will believe they will not get caught and continue to collude. - if consumer has brand loyalty: cheating on a collusive pact is not worth it if you know consumers are not going to switch supplier - If the good is highly differentiated, it allows cartels to set high prices much more easily and still expect stong consumer loyalty

What are factors may firms aim to compete on?

- Improve products: improving the quality of the product, or innovating to keep it up to date with the latest technologies , will mean the product remains competitive in the market. - Reduce cost: by reducing cost, new firms will not be able to compete on price terms with existing firms, so there will be less competition in the market. This also means the firm is being more productively efficient. - Improve the quality of the service provided: this is important in the service industry where consumers are likely to leave firms in which do not provide them with good customer service.

what are some of the assumptions of monopolistic competition

- Large Number of buyers and selllers in the market, each of which is relatively small and acts independently - There are low barriers to entry or exit - Firms producer differentiated products which means that they have a downward sloping AR curve and are price makers, but not to the same extent that monopolies are. - as products are slightly differentiated, they have to compete on non-price factors such as advertisng, quality and experience

What are some examples of barriers to entry not relating to costs

- Legal factors: patents can give the firms an advantage over others and firms may be given exclusive rights over production. this in turn will legally prevent new firms from operating within the market. - Marketing barriers: some large firms will gain market power through expensive marketing; new firms would struggle to gain a significant place in the market as other firms have such a strong brand image - Product homogeneity: homogeneous products are identical and produced by different firms. Firms find it easier to dominate a market when their product is distinguishable from other products and they hold a strong brand image.

What is the characteristics of a contestable market?

- No barriers to entry or exit - Large number of potential new entrants. This makes the threat entry real. Threat alone is enough to make a business change price and quanitity. - There is perfect information for both consumers and producers - Firms are vulnerable to 'hit and run' competition where because of the free entry and exit firms can join the market, price lower than other firms, take the consumer demand and then leave the market.

What are the benefits of oligopolies

- Oligopolies may adopt a highly competitive strategy, in which case they can generate similar benefits to more competitive market structures such as lower prices - Oligopolies may be dynamically efficient in terms of innovation and new product and process development. The Supernormal profits they generate may be used to innovate, in which case the consumer may gain. - Price stability may bring advantages to consumers and the macro-economy because it helps consumers plan ahead and stabilises their expenditure, which may help stabilise the trade cycle

what are shareholders in business

- Own the business: they have an equity stake or are perhaps a founder - mainly interested in growing the value of their shareholding by capital gain or dividends

What are each different stakeholder interested in?

- Shareholders/owners: returns on investment+profit dividends, success and growth of the business and proper running of the business. - Managers and employees: rewards including basic pay and other financial incentives,. job security & working conditions, promotion opportunties, job satisfaction. Customers: value for money, product quality and customer service Suppliers in the market: continues profitable trade with the business and financial stability Banks and other finance providers: can the business repay amounts loan or invested?, profitability and cash flows of the business, growth in profits and value of the business. Government: the correct collection and payment of taxes, helping the businesses grow, compliance with business legislation local community: success of the business, compliance with local laws and regulations.

What characteristics are looked at to categorise a market

- The number of firms in the market and their relative size - The number of firms which might enter the market - The ease of difficulty with which firms can enter or exit the market - The extent to which all firms in the market share the same knowledge - the extent to which goods in the market are similar - The extent to which the actions of a firm will affect another.

What are the benefits of monopolies

- They have the potential to be dynamically efficient - Monopolies can cross subsidies: a product or service which is profitable is able to support another product/service which is doing less well. - Although they may not be productively efficient they may be benefitting from economies of scale- more than a smaller firm may benefit.

what are some examples of monopolostic competition

- UK clothing market - Sandwhich shops - Restaurants - Coffee shops - Bars and Nightclubs

What are some evaluation points on contestable markets

- Whether the beneficial outcomes of a contestable market occur depends on hoe significant the increase in contestability is. Significant deregulation such as removal of legal barriers but other barriers remain high, some firms will still be deterred from enterung. - Markets may not be contestable in the long run because incumbent firms can price close to normal profit levels taking away threat of entry - in order to remain contestable, regulation must prevent limit pricing - there is a strong role for regulators to ensure markets are contestable in the long run e.g. removing legal barriers to entry, deregulation and legislation against limit pricing - Technological advancements can significantly improve contestability of a market without the need for government intervention. Ir removes barriers such as a physical premises.

what are the drawbacks of lower barriers to entry

- lower supernormal profits might reduce the finance available to fund capital investments - lower profits could lead to a weak tax revenue for the government - rapid entry of new firms might lead to over supply which drags prices lower and makes an industry less sustainable.

how many buyers and sellers are there is perfect competition

- many buyers and sellers in the market, none of whom is large enough to have any influence on the price. This type of market has many relatively small firms that supply goods to a large number of small buyers.

what are the advantages of lower barriers to entry?

- market becomes more contestable in the long run - in theory, competition drives down prices, which increases consumer surplus, real incomes and imporved affordability - competition improves product quality and drives innovation competition leads to higher productivity and a more efficient allocation of resources.

when is revenue maximised and why?

- maximimun total revenue occurs where marginal revenue is equal to zero. - this is because up until that point, added revenue can be achieved from producing and selling an extra until of output but after that point marginal revenue will become a negative value meaning that the firms will start to loose revenue is they produce and sell an extra unit and total revenue will begin to fall.

what is Strategic interdependence

- one firm's output and price decisions are influenced by the likely behaviour of competitors - Because there are few sellers, each firm is likely to be aware of the actions of others. Therefore decisions of one firm influenced and are influenced by the decisions of other firms.

What are some evaluation points regarding technology and contestability

- technology can raise barriers to entry through increased patents issued for innovative products. -Technology also facilitates anti-competitive practises such as using their size and financial advantage to advertise heavily online and drive competition out. - If incumbent firms react to increased competition by using anti-competitive strategies such as limit pricing, the number of potential entrants will not rise. Often incumbent firms will merge to dominate the market further. They will seek to protect themselves through the use of patents. - Improved information could be easily used against the consumer in the form of targeted pricing. They could alter information to misguide consumers to present information in a confusing manner.

Why are barriers to entry significant?

- the heigh of the barriers to entry affects the concentration of a market in the long run - high entry barriers and exit costs make a market less contestable. This then influences the conduct if firms in an industry - High barriers can result in a strong market power which can lead to a loss of allocative efficiency

Why does profit max occur at the point MC=MR

- up until the profit max point MR>MC meaning that the profit gained from producing that extra unit is greater than the cost meaning that overall profit increases - however at the Point MC=MR, the change in revenue from producing that extra unit is equal to the change in cost - beyond this point MC>MR which means that the cost of producing 1 extra unit of output is greater than the revenue gained and as a result the firm starts to lose profit

How has technology impacted conestability

-Technology advances have lowered barriers to entry and exit in a variety of markets. Technology such as the internet has drastically reduced start-up costs as business no longer need a physical premise to operate - Technology has made it easier to identify a gap in the market which couples with no barriers to entry mean established businesses need to be continuously improving their product or service to protect themselves from the competition. - Technolgy has improved the spread and level of information for both consumer and producers. Smart phones mean consumers have quick, accessible information at the touch of a button

how does consumer surplus relate to price elasticity of demand

-when demand for a good or service is perfectly elastic, consumer surplus is zero because the price that people matches what they are willing to pay. - In contrast, when demand is perfectly inelastic, consumer surplus is infinite. quantity demanded does not respond to a price change. whatever price the quantity remains the same. - When demand is price inelastic, there is a greater potential for consumer surplus because there are some buyers willing to pay a high price to consume the product.

how can divorce of ownership lead to the principal agent problem?

A principal (shareholders and owners) pays for na agent to act in their agent but instead the agents act in their own self interest. e.g. a firms shareholders may want a firm to maximise profits to increase the value of its sales. however is the managing directors pay is linked to revenue and sales, then they may choose to maximise those things instead.

what is a working monopoly

Any firm with greater than 25% of the industries' total sales

explain why a firm in a monopolistically competitive market makes supernormal profit in the short run

As the firm are profit maximisers the firm will produce where MR=MC. At that level output, the average revenue curve is above average cost meaning that supernormal profit is made

How does price discrimination relate to peak and off peak demand

At off peak times, market demand is low and firms will have spare capacity as such demand in elastic but at peal times, demand is high and marginal cost may also be higher as capacity limits are reaches. As such higher prices are charges at peak times.

What is the kinked demand theory?

Due to the interdependence in an oligopoly market, if the firm increases its price, other firms will not react. The firm which has increased its price will then loose market share. This means that for a price increase, demand is elastic. But if the firm was to reduce its price, its competitors will reduce price too in order to prevent an erosion of their market share meaning the firm will gain little extra demand. The demand for a price decrease is therefore inelastic. Therefore , prices will remain relatively stable (sticky price)

What is an example of creative destruction

Netflix and Blockbuster were previously two competitors in the video rental industry, but Netflix innovated and adapted their DVD subscription service to the advancing technology on the internet. This has resulted in them becoming the biggest video distribution network whilst Blockbuster has closed down and driven out of business and they did not innovate.

In the Kinked demand curve model, why is the Marginal Revenue curve not continuous?

The Kinked demand curve model is made up of two demand curves with different elasticities and different corresponding Marginal Revenue curves. Due to the different elasticities there is a vertical gap between where the Marginal Revenue curve is for a price increase with elastic demand and a Marginal Revenue curve for a price decrease with inelastic demand. This is because they don't intersect at the output level of q1 where the Kink is derived from.

What is 1st degree price discrimination

When a business charges each customer the price they are willing to pay.

What is 2nd degree price discrimination

When monopolist price discriminate according to the volume of purchase by a particular customer.

What is hit and run competition in contestable markets

Where people enter temporarily before leaving ince supernormal profit is exhausted.

What is price discrimination?

a business charging different consumers different prices for the same product.

What is a contenstable market

a market structure where there is freedom of entry and exit. It is a market structure which must have low sunk costs.

What is a oligoply

a small number of large firms dominating the market

why is productive efficiency achieved in perfect competition

all firms produce at the lowest point on the average cost curve, where MC=AC at the long run equilibrium point of production. This means all possible economies of scale are being exploited as firms cannot increase output and lower their average cost any further. - The lower the average can translate into lower prices for consumers increasing their consumer surplus - for the producer lower average cost can lead to higher levels of supernormal profit overtime and increases it's market share if economies of scale benefits translates to lower prices than rivals

what is the degree of product differentiation like in a market with perfect competition

all firms produce homogenous products. There is no branding of products and products are identical.

How does changes in demand affect consumer surplus

an increase in market demand causes consumer surplus to rise, the opposite happens

what are stakeholders in a business

an individual or organisation who has vested interest in the activities and decision making of a business

Why are monopolies allocatively efficient

as P>MC at the profit maximising output., this means that resources are not allocated according to consumer demand, they are recieving a lower quantity than they desire. Consumer choice is limited and prices are high, this reduces consumer surplus.

what are maximisers?

behave in a traditional economic way and always try to make the best possible choice from the available alternatives

what is the degree of knowledge like in a market with perfect competition

buyers and sellers posses perfect knowledge of prices. if one firm charges a high price than the market one, the demand for its products will be zero as buyers will buy elsewhere in the market. Hence the firm as to accept the market prices if it wished to sell into the market

what is process innovation

changes to the way in which production takes place or is organised, changes in business models and pricing strategies.

what are the other benefits that are likely to result from competition

consumers get wide variety of choice due to the number of firms in the market. Goods and services are likely to be of a higher quality, since firms are tyrying to gain consumer loyalty

why is product homogenity not in the best interest of consumers

consumers prefer variety rather than having a large number of sellers selling the same good or service.

What is static efficiency

how well scarce resources are being used at a point in time. The Key measures are allocative and productive efficiency

why may survival be an objective of a firm

if a firm is making a loss of threatened with a loss in the short run, they simply aim to survive so than it can possibly recover and grow at a later point

why can firm making a loss exit within the industry in the short run but not in the long run

if a firm is making a loss, at its equilibrium profit maximising level output in the short run the firm will stay in production if its loss is small than thee loss it would make if it was to shut down. but in the long run, firms will only stay in the industry if it covering all costs. If firms leave the industry, the level of supply will decrease and firms will continue to leave until the industry as a whole returns to profitability

why is the demand curve downward sloping in monopolistic competition

if a firm produces a product which is slightly different from that of its competitors, then it has a certain amount of market power. It will be able to raise price without losing all its customers to firms which have kept their prices stable. however because their is a large number of firms in the industry producing relatively close substitutes, its market power is relatively weak. small changes in price are likely to result in large changes in quantity demand as consumers switch to close substitutes. The demand curve facing the firm is therefore downward sloping but elastic

why won't firms continue within a perfectly competitive market not make super-nomal profit in the long run

if the firm was were making supernormal profit in the short run, other firms would enter the market eager to gain high profits. As there are no barriers to entry, supply to the market increases until the price is just low enough for firms to make normal profit.

why is allocative efficiency achieved in perfect competition

in perfect competition, firms produce where P=MC. This is where demand equals supply maximising the sum of both consumer and producer surplus. - At this point in production, resources are allocated according to consumer demand with consumer getting what they demand as the exact quantity they desire. Consumer choice is high, and prices are low, maximising consumer surplus in the market. - Producers benefit from being allocatively efficient by getting ahead of rivals who are not meeting consumer wants and needs. Overtime this can result in high profits for the business.

what is divorce of ownership and control

in small firms, the owner manages the company on a day-to-day basis. As firms grow the owners often raise finance by selling shares- the new shareholders become part owners of the firm. But the firm is actually run by directors who are appointed to control the business in the shareholder's interest. This is known as the diverse of ownership and control as the owners of a firm are no longer in day-to-day control.

why is dynamic efficiency not being achieved by firms in a monopolistically competitive market

in the long run, supernormal profit is not being made, therefore firms will not be reinvesting profits back into the business. This means over time consumers will lose out on technological advancements

What does most people associate dynamic efficiency with

innovation

What is consumer surplus

is a measure of the welfare that people gain from consuming goods and services. Consumer surplus is the difference between the maximum that consumers are willing and able to pay for a good or a service and the total amount that they actually do pay.

why is 1st degree price discrimination so profitable?

it is able to convert all consumer surplus into revenue for producer

What is perfect competition

large number of small firms with none large enough to dominate the market.

What is economic efficiency

making optimal use of scarce resources to help satisy needs and wants.

What is allocative efficiency?

occurs when the value that consumers place on a good or service equals the cost of the factor resources used up in production. This can be expressed as AR=MC

What is the purpose of price discrimination?

providing that extra units of goods or services can be sold for a price above the marginal cost of supply, price discrimination is an effective way to increase revenue and profits.

what is product innovation

small scale and subtle changes to the characteristics and performance of a good or a service

why are cartels dynamically efficient

supernormal profit is being made in the long run and such profit can be reinvested into the company in the form of technological advances innovative new products, and research and development.

why is dynamic efficiency not achieved in a perfectly competitive market

supernormal profits are not being made in the long run therefore restricting the firms ability to reinvest back into the business. over time consumers lose out with no technology advances or innovative new products reducing their choice and also preventing price falls in the future. for producers, their profit making potential reduces without research and development and new product launches which could have been patentable providing monopoly power. new products could have increased market share and better technology could have allowed firms to reduce cost of production and thus become profitable overtime.

What theory does price discrimination challenge

takes us away from the standard assumption in theory of the firm that there is a single profit maximising price for the same good or service.

where is producer surplus represented

the area above the supply curve and below the price

Where is the consumer surplus represented

the area under the demand curve and above the market price. consumer surplus rises or falls as the as the market price for a good or service changes

why does a firm in a monopolistically competitive market not make supernormal profit in the long run

the firm will remain to produce as MC=MR but lack of barriers to entry to the market will mean the more firms will enter the market as they are attracted to the profit. This will increase supply of the market and each frim will see a fall in demand for its product, shfiting the average revenue

What are barriers to entry

the high start-up costs or other obstacles that prevent new competitors from easily entering an industry or area of business.

why may firms decide to maximise revenue

the larger the sales revenue, the higher the likely pay and prestige of senior managers

why may sales maximisation be used as a satisficing objective

the level of production where sales are maximised is where average costs = average revenue . At this level of output firms make normal profit which may be seen as a satisficing point for the business.

why is the supply curve in perfect competition the firms marginal cost curve

the marginal cost of production os the lowest price at which the firm would be prepared to supply an extra unit of output at. If MC>P then they would not produce the product.

What is important in contestable markets?

the threat of competition should be sufficient to keep prices low and prevent abuse of monopoly power.

Why are monopolies x inefficient

they don't have the pressure to keep costs low in order to protect their profit margins.

Why are cartels productively inefficient

they don't produce on the minimum point on their average cost curve choosing to forgo some economies of scale due to limiting output.

Why are cartels allocatively inefficient

they exploit consumers by charging prices greater than marginal cost. Consumer choice is restricted and prices are high reducing consumer surplus in the market

How is Price Leadership a form of tactic collusion

when one firm on the market sets the price that other firms in the market follow. The price leader is often the largest firm in the market and the price followers. the smaller firms in the market. The firms in the industry effectively collude to maximise their profits. The price leader sets a p[rice that allows it to earn abnormal profits but at the same time also allows price followers to earn a higher profit that would be the case if competition broke out.

What is a monopoly

when only one supplier is in the market

What is tactic collusion

when there is still collusion but firms do not make any formal agreements about cooperating together. Instead firms monitor each others behaviour closely.

why is the demand curve in perfect competition horizontal?

within perfect competition, there is a large number of small sellers in the market. If one on the firm decides to double output, industry supply will increase, pushing the supply curve to the right. however the increase in supply will be very small because the firm is small. As a result, the resulting movement along the demand curve will be impossible to distinguish and the price will not change. A firm in perfect competition can therefore expand output without influencing the price as they cannot their raise their price and expect to sell more due to the homogeneity of their products and perfect knowledge. The demand curve for an individual firm in a perfect competition market is therefore horizontal.