Market Structures and Monopoly

Flashcards covering concepts related to market structures, perfect competition, and pure monopoly.

What are the learning outcomes related to market structures?

Characterize and distinguish between different market structures, explain output and pricing decisions, apply the profit-maximizing rule, and explain the adjustment from short run to long run in perfect competition.

What are the four different types of market structures?

Perfect competition, monopolistic competition, oligopoly, and monopoly.

What are the learning outcomes related to market structures?

Characterize and distinguish between different market structures, explain output and pricing decisions, apply the profit-maximizing rule, and explain the adjustment from short run to long run in perfect competition.

What are the four different types of market structures?

Perfect competition, monopolistic competition, oligopoly, and monopoly.

What determines market/industry structure?

Number of firms, easiness of entry and exit, market power of the players, and sizes of the players.

What are the characteristics of perfect competition?

Very large number of small firms, identical standardized product, zero control over price, very easy conditions of entry, and no non-price competition.

What are the characteristics of monopolistic competition?

Many relatively large firms, differentiated product, some control over price, relatively easy conditions of entry, and very significant non-price competition.

What are the characteristics of oligopoly?

Few large firms, standardized or differentiated product, limited control over price, not easy to enter, and significant non-price competition.

What are the characteristics of pure monopoly?

Only one firm, unique product with no close substitutes, very considerable control over price, blocked conditions of entry, and mostly public relations and advertising for non-price competition.

Under perfect competition, can a single firm influence market price?

A firm under perfect competition is a price taker and not a price maker.

What is Total Revenue (TR)?

Total sales obtained from selling a given quantity of output (Q x P).

What is Average Revenue (AR)?

Total revenue per unit sold (TR/Q), which equals price (P) under perfect competition.

What is Marginal Revenue (MR)?

The addition to total revenue obtained from selling one more unit of output.

What is the profit-maximizing rule?

Profit is maximized or loss minimized where marginal cost equals marginal revenue (MC = MR).

How does a purely competitive firm maximize economic profit or minimize loss?

Adjusting output.

What are the two approaches to determine the level of output at which all market structures will realize maximum profit or minimum loss?

Marginal-Revenue Marginal-Cost Approach (where MR=MC).

Law of diminishing marginal returns

As additional variable inputs (costs) added to fix input there will be a point where additional inputs increase production per unit at a decreasing rate.

What will produce an economic profit?

Outputs within the two break-even points (TR=TC).

Normal Profit

Make enough revenue to cover all economic costs and stay competitive.

What is the profit maximising guide in the short run

MR=MC rule.

Why is MR=MC the profit maximising guide in the short run?

Because if they are not equal it means producing an extra or lesser unit will increase profits

When should a firm shut down in the short run?

If P < AVC.

Under what conditions will Economic Profit occur?

P=MR>ATC.

Under what conditions will Normal Profit occur?

P=MR=ATC.

Continue producing if P > AVC

Continue producing.

Shutdown if P<=AVC

Shutdown.

For as long as AVC < P < ATC

Keep operating in the short run.

What are the key characteristics of pure monopoly?

Single seller, no close substitutes, price maker, extreme barriers to entry, and non-price competition.

Where does Monopoly power derive from?

Arises from legal sources, economic sources, resource control, and locational advantages.

In monopoly the demand curve is relatively what?

Demand curve is relatively inelastic (downward sloping).

P, AR and MR in monopoly

P = AR > MR.

So what is profit maximising price in Pure Monopoly?

Produce where MR = MC (profit maximising output).

Can the monopolist change quantity supplied to increase or reduce price?

The monopolist is a price maker.

Why does the monopolist has no supply curve?

The monopolist has no supply curve because there is no unique relationship between price and quantity supplied independent of demand.

What are the three types of efficiency used in comparative evaluation of perfect competition and monopoly?

Allocative efficiency, productive efficiency, and dynamic efficiency.

What level should the government regulate the price to, to achieve the allocative efficient output level?

Set P to Pr which = MC

What do Regulations aims to get monopoly to do?

Aims to get monopoly to produce the allocative efficient output level.

What conditions must exist for price discrimination?

Monopoly power, market segregation, and no resale.