Chap14

market power

refers to the ability of a firm to manipulate the price of a product, usually above the perfectly competitive level.

Market structure

refers to categorizing of firms in a particular industry, based on their level of market power; for example, the number and size of firms, the nature of barriers to entry in the industry, and the degree and intensity of competition.

Perfect competition

a market structure where there is intensive competition, with no individual firm being large enough to have any market power to influence the price or quantity traded

price takers

firms that have no market power and are therefore unable to influence their price

perfect information

buyers and sellers have equal and easy access to information about products and prices in perfectly compeititve markets

asymmetric information

refers to missing, unbalanced or incorrect information that exists when no economic agent has more information than the other in an economic transaction

monopoly

market strcuture where there is a single supplier of a particular good or service, thus havcing the power to influence the market supply and price

price maker/price setter

a single or dominant firm that has significant market power enabling it to manipulate its prices as it has significant control over market supply

Barriers to entry

branding, legal barriers, anti-competitive practices, domination of resources, economies of scale

oligopoly

a market structure where a few large firms dominate the industry

non-collusive oligopoly

a form of oligopolistic market in which firms act independently, rather than colluding to act as a monopolist

Price rigidity

refers to the tendency of prices to remain unchanged in a non-collusive oligopoly. If a firm lowers its price, rival firms feel compelled to lower their prices or face a loss of revenue. If a firm increases its price, then rival firms will keep their prices unchanged and take some of that firm’s customers. Hence, there is a tendency for prices to stay the same

monopolistic competition

is a market structure in which many firms exist. But each firm has only a small degree of market power as they produce differentiated products

revenue

the money received from the sale of a firm’s output of goods and services

total revenue (TR)

the value of money received by a firm from selling its output of goods and/or services

Average revenue (AR)

refers to the price received from the sale of a good or service

total cost

The sum of fixed and variable costs of producing a good or service

Fixed costs

such as insurance premiums and advertising costs are expenses that do not change with the level of output

Average fixed cost

the production cost that do not change with the level of output

Total variable costs

the overall production costs incurred directly from the output of a particular good or service. TVC continues to rise with higher levels of output, such as labout costs and raw material costs

Average variable costs

production costs incurred directly per unit of output for a particular good or service

Average costs

the unit costs of production that is the cost of producing one unit of output

profit

the positive difference between a firm’s total revenue and its total costs. it is calculated using the formula: TR-TC

Marginal cost

the cost of producing an extra unit of output. it is calculated by dividing the change in total costs by the change in the level of output.

MC= change in TC over change in quantity

Marginal revenue

the extra revenue received from the sale of an extra unit of output

MR = ΔTR ÷ ΔQ

abnormal profit

profit that is greater than normal profit, thereby creating incentives for producers to increase output

Normal profit

exists when a firm earns just enough revenue to cover its total costs of production and remain operational in the industry, that is, there is zero economic profit

Loss

occurs when a firm experiences negative economic profit. that is its total costs of production excedds its total revenue: TC>TR

The short un average cost (SRAC)

represents the cost per unit at different levels of output when at least one factor of production is fixed, such as capital resources.

AFC+SRAVC

The long run average cost (LRAC)

represents the cst per unit at different levels of output when all factors of production are variable. it is equal to the average fixed cost plus the average variable cost

allocative efficiency

the socially optimal situation that occurs when resources are distributed in such a way that consumers and producers get the maximum possible benefit, that is when no one can be made better off without making someone else worse off

profit maximisation

assumed to be the key goal of firms operating in the private sector. The largest positive difference between total revenue and total costs occurs at the ouput level where MC=MR

natural monopoly

occurs when only one firm can operate in a market profitably

collusive oligopoly

an agreement between two or more oligopolistic firms to limit competition by using restrictive trade practices, such as price fixing or collectively limiting output

cartel

anti- competitive agreement between oligopolistic firms in the same industry to collude by fixing privces or to restric the level of output, thereby effectively acting as a monopolist

non-collusive oligopoly or compeititve oligopoly

refers to competing firms with mutual interdependence this means they consider the likely or possible actions and reactions of their competitiors when determining pricing and non- pricing strategies

Game theory

attempts to explain the nature of strategic interdependence when making a decision in oligopolistic markets by considering the actions of competitors and based on probable outcomes

Price competition

the use of pricing strategies to compete in an industry

price rigidity

refers to the tendency of prices to remian unchanged in non-collusive oligopoly

market concentration

measures the extent to which sales revenue in an industry is dominated by one or more of the largest firms

Concentration ratio

measures the degree of market power (or market concentration) in an industry by adding the combines market share of the largest few firms

Herfindahl Index

is a measure of market concentration that gives greater weighting to the market power of larger firms by squaring the value of their market share

economies of scale

lower average costs brought about by an increase the long run scale of production

The minimum efficient scale

occurs at the point when all economies of scale have been exploited. This is shown at the lowest point of the LRAC curve

Internal economies of scale

lower average costs brought about by an increase in the size of firm itself

External economies of scale

lower average costs of production brought about by an increase in the overall size of an industry

Diseconomies of scale

increasing average costs of production caused by an increase in the scale of production

Nationalisation

the purchase of privately owned assets or industries by the government. This usually occurs when the government takes control of an industry previsouly in the private sector in order to run it in the best interest of the public

characteristics of perfect competition

many firms, barriers and homogeneous products

characteristics of monopoly

a single or dominant firm, high berriers to entry, no close substitures

characteristics of oligopoly

a few large firms, high barriers to entry and interdependence

characteristics of monopolistic competition

many firms, free entry and product differentiation

formula: TR

TR=PxQ

formula: AR

AR= TR/Q hence AR=P

formula: AFC

AFC = TFC over Q

formula: AVC

AVC = TVC over Q

formula: TC

TC = TFC + TVC

formula: AC

AC=TC over Q

Internal economies of scale includes:

specialisation, efficiency, marketing, purchasing

External economies of scale includes

Lower recruitment costs, Ancillary services

Legislation and regulation

The prevention of mergers, promoting competition, forced pricing strategies and sale of existing assets

High barriers to entry

branding, legal barriers, anti competitive practices, domination of resources and economies of scale

Specialisation

Highly specialised labour in the firm are highly productive in the output of goods and servcies. Larger firms are able to divide the production process into specific tasks so workers can become more skilled for that particular task. As a result, productivity increases and lowers average cost of production

Larger firm → greater specialization → higher productivity → lower average cost → economies of scale.

managerial economies of scale

Efficiency

larger firms have specialised machinary, equipment and tools, which can be used to their full potential, reducing the average cost of production

technical economies of scale

Marketing

Effective marketing/advertisement can boost sales which allows the firms to be operating at the bigger scale of production. This lowers the average cost of production per unit. Marketing economies of scale

Purchasing

Large firms often purchase in bulks, meaning that they have higher negotiation power. As a result, they could potentially lower their price per unit, lowering their average cost per unit overall.

Bulk purchasing → bargaining power → lower input price/unit → lower AC → purchasing economies of scale.

Lower recruitment cost - external economy because it is beneficial to all firms in that specific market

If an industry is very large and well-established in an area, it is likely going to attract a lot of skilled workers as they want to be employed. This lowers the recruitment cost for firms because they dont need to spend revenu or time to find workers when they already have a large pool of workers to choose from.

Ancilary service

Firms need supporting services in order to function. Larger industries would attract different/multiple supporting services. Therefore, the supporting services will compete with one another, hence lowering prices for the firms in the industry. However, if the industry is small, there are only a few supporting services nearby; therefore, there’s not a lot of downward pressure on the price. Therefore, larger industries have higher external economies of scale.