2.5 Market Power (Not Complete)

Market Power

Market Power

The ability to raise prices and restrict output

Total Costs (TC)

Sum of all costs incurred by a firm in producing output

Average Costs (AC)

Total cost per unit of output (TC/Q)

Explicit Cost

The cost firms incurs when it buys a resource which it does not own e.g. equipment

Implicit Cost

Specialisation

Law of Diminishing Marginal Returns

Marginal Cost (MC)

The cost of producing an additional unit of a product (Change in TC/Change in Q)

Total Revenue (TR)

Total amount of money earned by a firm from selling goods and services

Average Revenue (AR)

Revenue earned by a firm per unit of output

Marginal Revenue (MR)

Change in revenue earned by a firm when it produces one more unit of output

Abnormal Profit

Occurs when TR>TC (AR>AC)

Normal Profit

Occurs when TR=TC (AR=AC). There is just about enough revenue to keep the firm in the industry.

Loss

Occurs when TR<TC (AR<AC)

Growth Maximisation

Satisficing

Corporate Social Responsibility

Perfect Competition

A market structure where there are a large number of small firms, a homogenous product, free entry and exit, and perfect information.

Perfect Competition Market Power

Firms have 0 market power as if 1 firms increases its price, consumers will switch to a cheaper substitute.

Perfect Competition PED

PED is perfectly elastic as if there is an increase in price, the demand will decrease infinitely as consumer will switch to a cheaper substitute.

Micro Short Run

A period of time when at least one FoP is fixed. Production occurs and firms cannot enter/exit the market.

Micro Long Run

A period of time when all Fop are variable. Planning occurs and can enter/exit the market.

Allocative Efficiency

When social surplus is maximised and producing the optimal quantity of a good from society’s POV (Q*). (MC=AR)

Productive Efficiency

When average cost and resource waste is minimised. (MC=AC)

Monopoly

A market structure where there is a single, dominant firm, product has no close substitutes, high barriers to entry.

Predatory Pricing

When a firm lowers price to make a significant loss that it forces other firm out of the market.

Economies of Scale

As a firm increases its output, its average cost goes down.

Natural Monopoly

When economies of scale are so large that an industry can only profitably support one firm.

Abuse of Market Power

When a firm raises prices significantly above P* and restrict output significantly below Q*.

Marginal Cost Pricing

A solution to the abuse of monopoly power, whereby the government forces a firm to charge a price equal to its marginal cost (MC=AR).

Average Cost Pricing

A solution to the abuse of monopoly power, whereby the government forces a firm to charge a price equal to its average cost (AR=AC).

Collusion

When firms agree to raise prices and restrict output to maximise collective profit.

Nationalisation

When the government buys an industry from private firms and runs it itself.