Perfect Competition and Monopoly Governing the European Economy

These flashcards cover key concepts related to perfect competition and monopoly as discussed in the lecture, helping students prepare for their exam.

What is perfect competition?

A market structure where many firms offer identical products, and no single firm can influence the market price.

Why are firms price-takers in perfect competition?

Because they cannot set prices above the market level; they must accept the prevailing market price determined by overall supply and demand.

What is the shutdown point?

The minimum price at which a firm can operate without incurring losses in the short run; if the price falls below this point, the firm opts to shut down.

What happens to the market if demand increases in perfect competition?

The price rises, leading firms to increase production, which shifts the market supply curve to the right. Each firm adjusts output according to the new price.

What happens to the market if innovation reduces cost?

The supply increases as firms can produce at a lower cost, leading to a lower market price and potentially higher quantity produced.

Why is a market with perfect competition efficient?

Because resources are allocated efficiently where price equals marginal cost, ensuring maximum consumer and producer surplus.

What is a natural monopoly?

A market condition where a single firm can supply the entire market at a lower cost than multiple competing firms due to economies of scale.

Why is the only firm a price-setter in a monopoly?

Because it is the sole provider of a product, allowing it to influence the market price based on its output decisions.

Why is the marginal revenue of a monopoly not equal to its average revenue?

Because, for a monopoly, to sell more units it must lower the price, causing marginal revenue to be less than the price.

How does a monopoly decide how much to produce?

A monopoly chooses the output level where marginal revenue equals marginal cost to maximize its profits.

What is the effect of a monopoly on welfare?

Monopolies often reduce total welfare by restricting output and raising prices compared to perfect competition, leading to deadweight loss.

What are the differences between a monopoly and a market with perfect competition?

Monopolies produce less and charge higher prices compared to perfect competition, where many firms operate, resulting in optimal output and pricing.