4.1.5.1 PERFECT COMPETITION, IMPERFECTLY COMPETITIVE MARKETS SND MONOPOLY

Explain how monopolies can be both price maker and quantity setters

A monopoly is both a price maker and a quantity setter because it is the sole supplier in the market with no close substitute meaning it faces the entire market to demand curve

Can a monopoly price make and quantity set at the same time?

No, a Monopoly has to choose one and the market demand curve dictates the other

How does a monopoly decide what to make the price and what to set the quantity?

The Monopoly finds the price maximizing quantity (MR = MC), and finds the price on the demand curve

Show a decrease in price in the loss in revenue and the gain in revenue

How does elasticity change along the demand curve?

Define trade

The buying and selling of goods and/or services

Define exchange

To give something in return for something else received. Money is s medium of exchange

Define market structure

The organizational and other characteristics of a market

Define entry barriers

Obstacles that make it difficult for a new firm to enter a market

Define exit barriers

Obstacles that make it difficult for an established firm to leave a market

Define product differentiation

The marketing or generally similar products with minor variations or the marketing of a range of different products

Explain the characteristics of perfect competition

• larger number of small firms

• homogenous (identical) goods

• price takers

• low barriers

• elastic demand curve

• normal profit

• allocative and productive efficiency

Explain the characteristics of a monopoly

• single seller

• unique product

• price maker

• high barriers

• downward sloping demand curve

• supernormal profits

• deadweight loss/inefficiency (an output is restricted and prices are artificially high)

Explain the differences in the spectrum of competition

What are market entry barriers?

Obstacles that prevent new firms from easily entering an industry

What are natural barriers?

Barriers that arise naturally due to the fundamental characteristics or economic structure of an industry rather than deliberate actions by existing firms, for example, economies of scale

What are artificial barriers?

Obstacles to market entry created by the deliberate actions of existing firms to keep competitors out of the industry

Give some example examples of artificial barriers

Patents, product differentiation, high levels of spending on advertising and marketing, limit pricing, predatory pricing

Explain 'patents' as artificial barriers?

Patents are legal protections

They completely block competitors from copying a product or process legally. This gives the patent holding firm a legal monopoly

Explain 'product differentiation' as artificial barriers?

Product differentiation includes branding, features, and quality

Established firms build strong brand loyalty overtime, causing new entrants to struggle

Explain why the profit maximizing role is MR = MC

What is divorce of ownership and control?

In large companies, the owners (shareholders) are different from managers (directors) who run the daily operations

• shareholders want to maximize profit and increase share value

• managers prioritize, their own power, salaries or status

Creating conflict

Give 4 examples of divorce of ownership and control

1. Information asymmetry between the principal and the agent

2. Managers and directors pursue an agenda of their own

3. Realign owners and directors through profit related pay or paying managers, partly by giving them company shares

4. Moral hazard

Explain each 4 examples of divorce of ownership and control

When does sales revenue maximization occur? (MR = 0)

Occurs when a firm pushes production until additional sales bringing no extra revenue, which results in a higher volume of goods and services sold at a lower price compared to standard profit maximization (MR = MC)

Explain the implications of sales revenue maximization?

• higher output, lower price

• lower but positive profits (abnormal profits are still earned as long as price remains higher than the average cost)

Why do firms sales revenue maximize?

Firms do this to gain market share, build brand scale, or push out competitors

Define profit satisficing

A business management approach where a firm aims to earn an adequate or satisfactory level of profit to keep its owners and stakeholders content, rather than striving to maximize profit at all costs

Give some examples of managers likely objectives

• prestige

• power

• high salaries

Give some examples of workers likely objectives

• improved job security

• working conditions

Explain my managers, try to resolve the conflict between the different interest groups by replacing the profit, maximizing objective with profit satisficing

By sacrificing maximum profits, managers can redirect resources towards workers objectives (like higher wages, better working conditions, and job security)

• this prevents strikes, boosts employee morale, reduces staff turnover and ensures long term survival and stability of the company

Short run profit maximizing

Firms cannot enter or exit the industry, output is chosen where MR = MC, profits can be super normal, normal or a loss

Long run profit maximizing

Perfect freedom of entering exit, output is chosen where P = MC = MR = min ATC, only experience normal profit

Perfect competition

• one firm in the market

• the whole market

Outline one way in which consumers can benefit from a lack of competition in a market

Economies of scale - a large monopoly or dominant firm can produce goods at a much larger scale, reducing its average costs

If there cost savings are passed on consumers, it can result in lower prices

Describe one circumstance, apart from when there is little or no competition in the market, in which the pursuit of self interest may be undesirable in the economy

Negative externalities, when individuals or firms act purely out of self-interest, they may ignore external costs they impose on society (for example, example of factory dumping, toxic waste into a local river to minimize its own waist disposal cost, which harms the environment)

When may cooperation between individuals be preferable to individualistic economic behavior

Provision of public gods such as street lighting, natural defense, and public parks

Cooperation through government and community action ensures these are funded and maintained for everyone

Does the invisible hand of the market always leads to markets performing well?

No - due to information asymmetry, market power, and missing markets

When can productive efficiency and allocative efficiency occur at the same time?

In the long run equilibrium of a perfectly competitive market

Does this happen in the real world?

No

Where on a diagram does allocative efficiency occur?

P = MC

Explain allocative efficiency

• the price represents the value consumers place on the last unit consumed

• MC represents the cost of society of producing that unit

Where on a diagram does productive efficiency occur?

At the lowest point of the AC curve

Show the diagram for both of these efficiencies

If P > MC, how will the consumer behave?

Consumers demand more (as consumers value the next unit of the good more than it cost society to produce it)

If P < MC, how will the firm behave?

The firm reduces production

Explain that allocative inefficiency is where P > MC and P < MC?

P > MC - underproduction - resources are under allocated

P < MC - overproduction - resources are over allocated

Why do some firms leave a perfectly competitive market in the long run?

As more firms enter the market, supply increases, which decreases the price discouraging firms to stay in the market

Show this on a diagram

When does the equilibrium occur in a monopoly?

When MC = MR

When does the equilibrium occur in a perfectly competitive market?

When MC crosses AR