Econ market failure 2.8-2.12

Characteristics of perfect competition

• large number of firms

• all firms produce homogenous goods

• free entry and exit

• perfect information.

Types of profits in SR PC

• economic profit

• economic losses

• break even

• shut down price

• loss making firms

profit maximising

MR=MC

Profits in LR PC

always end up at break even, due to barriers to entry being low shifting the supply shifting the price

allocative efficiency in PC

in SR and LR, and MC=P=MR

Productive efficiency in SR

always in LR and SR at break even

characteristics of a Monopoly

• Dominant firms, or single seller

• high barriers to entry

• no close substitutes

types of barriers to entry Monopoly

economies of scale, branding, harsh advertising, legal barriers

Types of profits in Monopoly

profit, losses, break even

Revenue maximising firm in Monopoly

MR=0

Profit maximising firm in monopoly

MR=MC

allocative efficiency in monopoly

MC=P=AR

Productive efficiency in monopoly

Min ATC=MC

Oligopoly characteristics

• high barriers to entry

• small number of large firms

• interdependence

interdependence in Oligopoly

decision of ones firm affects that of another and they take this into consideration when making decisions

game theory and oligopoly

explains the Nash equilibrium and interdependence of oligopoly, and how both will end up worse off in price wars, due to incentives to cheat

competition in oligopoly

• Price competition: price wars which they try to avoid

• non price competition

types of oligopolies

• collusive

• non collusive

Collusive oligopoly

oligopoly that has agreed to collude in contract of agreement, in which competition is limited by; fixing prices, keep at certain price, or raising price by same amounts

what’s another name for a collusive oligopoly

cartel; formal agreement to limit competition and increase profits —> act as monopoly

why is it difficult to keep an maintain cartel/collusion

• incentives to cheat

• different costs mean can agree to different price

• number of firms in cartel—> more difficult to agree on price

• possibility of price wars

non collusive oligopoly

each firm behaves independently but still considers each other actions

concentration ratio

percentage of output produced by the given number of largest firms in a given industry

Characteristics on monopolistic competition

• large number of firms

• no barriers to entry

• product differentiation

types of product differentiation

• location

• services

• quality

• product image

what is the demand curve of monopolistic competition

slightly more elastic than that of monopoly

what is monopolistic competition all about

all about convincing consumer that their product I better—> establish a monopoly for their products

types of competition in monopolistic competition

• non price competition

• price competition

non price competition in monopolistic competition

• branding

• product differentiation

• advertising

  • with this can increase prices whilst still maintaining customers

profits in LR for monopolistic competition

always end up at break even same as perfect competition due to low barriers to entry

allocative efficiency in monopolistic competition

P=MC=AR

Productive efficiency in monopolistic competition

MC at min ATC