CH7 Market Power

Market Power

The ability of a firm to control the price at which it sells its product

. Perfect Competition

A market structure with numerous small firms selling homogeneous products with no barriers to entry where firms are price-takers

. Monopolistic Competition

A market structure with many small firms selling differentiated products with free entry and exit

. Oligopoly

A market structure dominated by a few large firms with high barriers to entry and interdependence between firms

. Monopoly

A market structure where a single seller provides a unique product with no close substitutes and high barriers to entry

. Homogeneous Products

Identical or undifferentiated products that have no brand names such as agricultural commodities

. Product Differentiation

The process of making a product different from rivals through physical features quality location or branding

. Barriers to Entry

Factors such as economies of scale or legal patents that prevent new firms from entering an industry

. Price-Taker

A firm that has no ability to influence the market price and must accept the price determined by industry supply and demand

. Price-Maker

A firm that faces a downward-sloping demand curve and has the ability to choose its own price and output combination

. Total Revenue (TR)

The total earnings of a firm calculated by multiplying the product price (P) by the quantity sold (Q)

. Marginal Revenue (MR)

The additional revenue a firm receives from selling one more unit of output

. Average Revenue (AR)

The revenue per unit of output sold which is mathematically always equal to the price of the product

. Explicit Costs

Money payments made by a firm to outsiders to acquire resources such as wages for labour or payments for materials

. Implicit Costs

The opportunity cost or sacrificed income arising from a firm using resources it already owns

. Economic Costs

The sum of both explicit and implicit costs incurred by a firm for its use of resources

. Marginal Cost (MC)

The extra or additional cost incurred by producing one additional unit of output

. Normal Profit

Occurs when total revenue equals total economic costs resulting in zero economic profit while still covering the owner's entrepreneurship

. Abnormal Profit

Also known as supernormal profit it results when total revenue is greater than total economic costs

. Profit Maximisation Rule

The principle that a firm should produce at the level of output where Marginal Cost (MC) equals Marginal Revenue (MR)

. Allocative Efficiency

Achieved when P = MC (or MB = MC) meaning firms produce the combination of goods most preferred by consumers and social surplus is maximised

. Economies of Scale

Decreases in long-run average costs of production as a firm increases its scale of production and factors of production

. Diseconomies of Scale

Increases in long-run average costs of production as a firm grows too large and faces coordination or communication difficulties

. Natural Monopoly

A firm with economies of scale so large it can supply the entire market at a lower average cost than two or more smaller firms

. Interdependence

A core feature of oligopoly where the actions and pricing decisions of one firm significantly affect its rivals

. Collusion

An agreement between firms to limit competition by fixing prices or restricting output to increase joint profits

. Cartel

A formal agreement between member firms to act collectively like a monopoly to maximise industry profits

. Game Theory

A mathematical technique used to analyse the strategic behavior of interdependent decision-makers who must outguess their rivals

. Concentration Ratio

A measure showing the percentage of total industry output produced by the largest firms in that industry

. Abuse of Market Power

Anti-competitive practices such as charging artificially low prices to eliminate competitors or refusing to deal with certain customers