2.11 mnarket failure market power type shit

definition of market power

• ability for hte firm to contorl the price of its product

• the greater the market power, thje greater thje market inefficiency (market FAILURE) → Due to no competition in the market

perfect competiton charactesritics

• homogeneous products (there are no product differentiation at all)

• firms are free to enter and leave the market anytime (no prodcut differntaition → prodcut is fairly easy to replicate or anyone can make it too)

• price is determiend by the market → hence fimrs are the price taker

• in the long run: there’s allcoative efficiency → price CONSTANTLY at the equilibirum level since they are price takers, the market DETERMINES The price

• low to no barriers of entry

monopoly charactersitics:

• firms are the price setter of the market

• becuase their prodcuts are heterogeneous products

• A lot A LOT of product differntiation, to the point that there are no other firms in the market that can even compete with the monopoly

• dominating the whole market → extrmee high barriers of entry

• however becuase the firm sets the price, the market is constanatly NOT in market equilibrium → allocative inefficiency

• in the long run, abnormal profit is earned

monopolistic competition

• there are low barriers of entry

• maret is dominated by many little or middle sized firms

• there are some product differntiaotn

• non price competition, i.e ecompetiton in the quality

• low barriers of entry, fimrs are free to enter or leave the market

• EXAPLE: toothpaste, clothing

oligopoly

• market is dominated by a few large firms

• highly interdependent of each other, a change of price in one firm will affect the other

• the firms that dominates ar ethe price setter

• high entry of barriers, differentriated proedcuts, firms cannot easily leave nor enter the market

state 2 adantages of market power

1. eocnomies of scale → as there is an increase in the size of the toal output, the average cost decreases (example: bulk buying)

2. abnormal profit → can do R&D → Technology development increase in living standards, iuncrase company’s potnential output, increases efficiency

explain why point MR=MC is the point of profit maximisaiton

1. define MR

2. define MC

3. state what happens if one of them is larger than the other

4. finally state that why

1. MR = marginal revenue is the additional revenue earned after selling one more unit

2. MC = marginal cost is the additional cost needed to produce 1 additional unit of output

3. if MR>MC, revenue is more than the cost, abnormal profit is earned, producing more = earn more profit

4. if MR<MC it is having a lost, cost of producing an additional unit of output exceeds its additional amount of revenue its able to earn producing more reduces profit

5. so when MR = MC, this is the point where total profit is at highest

descibe economies vs diseconomies of scale

economies of scale: advantages from increase in production scale causing decrease in average cost

what is the graph for economies of scale

what are the caues of economies of scale (3)

• rreaserach and development → causing arise and usage of new technology which is able to increase the productivity and decrease the cost(e.g machinery with a lower cost can replace workers → fire them!!!)

• bulk buying → inoout discount!

• specialisaiton of labour wokrers → kabours are used efficently!

what is diseconomies of scale and how is it caused (3)

diseconomies of scale: increase of production scale causes increase in average costs

this is caused by:

• poor communicaiton → e.g the company has a too big of a scale → leading to poor communicaiton

• slowed decision making agian du to too great of a sclae of the company

• reduced worker’s motiaviotn and efficeincy

differentiation between implicit and explicit cost

implicit cost: opportunity cost, payed by self owned resoruces from the firm or sth

explicit cost: the cost needed for factors of production or anything needed for payment like factor income, rent

differentiate between long run and short ru

• long run: all factors of produciton are varibale

• short run: at least 1 factor of production is fixed

describe briefly why AC intersects MC at AC’s lowest point

• when MC>AC, AC increases

• when MC<AC, AC decreaes

• therefore when MC = AC, it is at the minimum point of AC

what are the goals of firms in a market

1. CSR corporate social responsibility → producing goods ethically and sustainably, decreaes negative prodciton externaltiy → creates a positive reputation

2. satisficing → not aiming to maximise profit, just aiming to achieve a satisfactory revenue or profit

3. revenue maximisaiston → producing products where MR=0, TR is at highest

4. profit maximisaiton → producing at MR=MC (POINT OF PROFIT MAXIMISAITON OUTBUT)

long run adjustments of the perfect competition → why in the long run perfect competion alwasy EARNS NOMRAL PROFIT INSTEAD OF ABNORMAL profit?

when there is an abnormal profit → attract new firms and new firms enter the market becuase in perfect cinmpeti9on, ther eare no product differntaition, homogeneous prodcuts, and hence firms are able to join and leave the market easily → once there are more firms in the market there will be more supply in the market → an increase in supply will lead to decrease in price, and hence the abnormal profit will go back to the normal profit

more and more firms will join until the profit drops until beocme loses, once firms experince loses, they are free to leave the market, so supply will start to decrease until the point where it reaches normal profit again

graph: all firms provide at P=AC meaning there are 0 economic profit

evaluation of perfect competiton: advantages and disadvantages? (2 for adv 3 for disadv)

advantages:

• productive efficiency acheived: when P=MC

• since fimrs are the price takers, the price is set by the market, it could be a low price,

disadvantages:

• small firms → can’t ahcieve eonomies of scale, cannot increase output level and aim to have a lowered cost through bulk buying

• no abnormal profit earned = no innovaiton

• externaltieis presence = market stil not in allcoative efficeincy and allcoative efficenyc cant be achieved