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What is the spectrum of market structures?
perfect competition, monopolistic competition, oligopoly, monopoly
What factors distinguish market structures?
Number of firms in the market.
Degree of product differentiation.
Ease of entry and exit.
What is the profit-maximizing rule for firms?
Firms maximize profit where marginal cost (MC) equals marginal revenue (MR).
What is the "divorce of ownership from control"?
when the owners of a firm no longer in day to day control. the firms now ran by directors wha are appointed to control the firm in the shareholders interest
reasons for divorce of ownership from control
consequences of the divorce from control
lead to principal agent problem - a principal pays for an agent to act in their interest but instead the agent acts in their own self interest
What are other objectives firms may pursue?
Survival.
Growth.
Maximizing sales revenue.
Increasing market share.
Quality improvement.
What is satisficing
trying to do just enough to satisfy important stakeholders instead of aiming to maximise profits
What are the key characteristics of perfect competition?
Large number of producers.
homogenous products.
Freedom of entry and exit.
Perfect knowledge of prices and products.
perfect competition - price takers or makers
price takers - have to accept market price
What is the outcome of perfect competition under certain assumptions?
It leads to an efficient allocation of resources, assuming no externalities exist.
What are the main characteristics of monopolistic competition?
imperfect competition. Firms are short run profit maximisers.
non-homogeneous products due to branding (there is product differentiation)
How does monopolistic competition compare to perfect competition?
Monopolistic competition involves product differentiation and non-price competition, unlike perfect competition.
What are the key characteristics of an oligopoly?
High barriers to entry and exit
High concentration ratio
Interdependence of firms
Firms are interdependent in an oligopoly. This means that the actions of one firm affect another firm's behaviour.
Product differentiation
What is a concentration ratio, and how is it calculated?
the combined market share of the top few firms in a market.
add however many it asks eg 4 firm conc ratio add up top 4
What are collusive and non-collusive oligopolies?
Collusive: Firms cooperate to control prices and output (e.g., cartels).
Non-collusive: Firms compete without formal agreements.
difference between cooperation and collusion.
What is the kinked demand curve model?
what's a cartel
A cartel is a group of two or more firms which have agreed to control prices, limit output, or prevent the entrance of new firms into the market.
consequences of cartels on consumers
higher prices for consumers and restricted outputs
price leadership
when one firm changes their prices, and other firms follow.
firm is usually the dominant in the market. Others are often forced into changing prices too or they risk losing their market share.
Price wars
firms constantly cutting their prices below that of its competitors.
Non-price competition
aims to increase the loyalty to a brand, which makes demand for a good more price inelastic.
oligopoly adv and disad
pros - Eos innovation stability cons - higher prices reduced output potential collusion
What influences monopoly power?
Barriers to entry, number of competitors, advertising, and degree of product differentiation.
pros and cons of a monopoly
pros - EOS ability to invest into research and development. cons - HIGH prices reduced consumer choice potential inneficiency
What are the conditions for price discrimination
Market power. and Ability to segment the market.
What are the advantages and disadvantages of price discrimination?
Advantages: Increased producer revenue, potentially lower prices for some groups. Disadvantages: Higher prices for some consumers, reduced consumer surplus.
benefits of competition in the short run
Lower prices, improved quality, greater choice.
What are the benefits of competition in the long run?
Innovation, technological advances, and efficient resource allocation.
What is the process of creative destruction?
What is a contestable market?
A market where firms can enter and exit freely, facing low barriers to entry and sunk costs. eg a food truck
What is hit-and-run competition?
When firms enter a market temporarily to take advantage of high profits and then leave once profits fall.
What is the difference between static and dynamic efficiency?
Static efficiency: Achieved at a single point in time, focusing on productive and allocative efficiency. Dynamic efficiency: Achieved over time, focusing on innovation, research, and development.
What are the conditions for productive and allocative efficiency?
Productive efficiency: Minimizing average total costs. Allocative efficiency: Price equals marginal cost (P = MC).
What is consumer surplus?
The difference between what consumers are willing to pay and what they actually pay.
What is producer surplus?
The difference between the price producers receive and the minimum price they are willing to accept.
How do monopolies affect consumer and producer surplus?
Monopolies reduce consumer surplus and increase producer surplus, often causing deadweight loss.
