Competitive Markets

A set of flashcards covering key vocabulary terms related to competitive markets, their structures, influences, and economic theories.

Types of Competition

The four competitive models are perfect competition, monopoly, oligopoly, and monopolistic competition.

Perfect Competition

A market structure characterized by a large number of small firms, identical products, ease of entry, and price taking behavior.

Monopoly

A market structure where a single firm dominates the market, with significant control over price and high barriers to entry.

Oligopoly

A market structure with a small number of large firms that dominate the market and have some control over pricing.

Monopolistic Competition

A market structure where many firms sell products that are similar but not identical, allowing for some price control.

Barriers to Entry

Obstacles that make it difficult for new firms to enter a market, including:

• Economies of Scale

• Brand/Company Recognition

• Natural Monopolies

• High Start-Up Costs

• Ownership of Raw Materials

• Patents

• Unfair Competition

Price Discrimination

The practice of charging different prices to different consumers for the same product or service without a difference in cost.

Dumping

Selling a product in a foreign country at a lower price than in the domestic market, considered a form of price discrimination.

Kinked Demand Curve

A demand curve associated with oligopolies, showing that price changes may not result in significant changes in quantity demanded due to competitors' reactions.

Collusion

A secret agreement among firms to fix prices or limit production, often illegal in competitive markets.

Cartels

A formal arrangement among producers to regulate price and total output of a product, acting collectively like a monopoly.

Creative Destruction

The process by which new innovations disrupt old industries, products, and practices, popularized by economist Joseph Schumpeter.

Marginal Cost (MC)

The additional cost incurred from producing one more unit of a good or service.

MC = ΔTC/ΔQ

Ex: TC2-TC1/Q

Marginal Revenue (MR)

The additional revenue earned from selling one more unit of a good or service.

MR = ΔTR/ΔQ

Ex: TR2-TR1/Q

Economies of scale

• Defined as the cost benefits of large scale production

• New firms may be deterred by the presence of large competitors

Mergers

The combination of two or more companies into a single entity, often to enhance competitive advantage or achieve economies of scale.

Retail Price Maintenance

A practice where manufacturers set the minimum price at which retailers can sell their products to ensure consistent pricing and protect brand image.

Average Fixed Cost (AFC)

As output increases, AFC decreases. AFC = FC/Q

Average Variable Cost (AVC)

U-Shaped Slope

AVC = VC/Q

Average Total Cost (ATC)

ATC = TC​/Q = AFC + AVC

Variable Costs

Costs that vary based on the quantity of output produced. Examples include raw materials and direct labour.

Fixed Costs

Costs that do not change with the quantity of output produced. Examples include rent, insurance, and salaries of administrative staff.

Cost Function

TC(Q) = FC + VC(Q)

Profit Maximization: Perfect Competition

MR=MC=P

Break-Even Point: Perfect Competition

The level of output where a firm earns zero economic profit (TR=TC). This occurs when the market price equals the average total cost.

P = ATC

Shut-Down Point: Perfect Competition

The level at which a firm decides to cease production because it cannot cover its average variable costs.

P<AVC

Profit Maximization: Monopoly

Maximizes profit at MR = MC. The price is then determined by the demand curve at that profit-maximizing quantity, which will be greater than marginal cost. P > MR = MC

Competition Act

A law that promotes or regulates competition among businesses by preventing monopolistic practices and ensuring fair pricing.

• Mergers

• Agreements that restrict competition

• Retail price maintenance

• False advertising

• Price discrimination

• Predatory pricing

Bait and Switch Advertising

A deceptive marketing strategy where consumers are attracted by advertising a low-priced item but are then pressured to purchase a more expensive item instead.