Market Structures and Competition

Flashcards reviewing key concepts from the lecture notes on market structures and competition.

What is a firm?

A for-profit company or business that produces a good or service.

What is an industry?

All the firms in the marketplace selling the same product or service.

What characterizes perfect competition?

Many sellers of an identical product, e.g., strawberry sellers.

What characterizes imperfect competition?

Many sellers of a similar product, e.g., cafes and restaurants.

What is a pure monopoly?

A sole supplier of a product with 100% market share.

When is a firm said to have monopoly power?

When a firm has more than 25% market share.

What is a natural/legal monopoly?

When the most efficient number of firms in the industry is one, often due to high fixed costs.

What is an illegal monopoly?

When a firm obtains market power through suppressing competition.

What characterizes an oligopoly?

An industry dominated by a few firms, with a five-firm concentration ratio greater than 50%.

What is a key characteristic of firms in perfect competition?

Firms are price takers.

What does it mean for goods to be homogenous in perfect competition?

Goods supplied by each firm are exactly the same.

What does freedom of entry and exit mean in perfect competition?

It is possible for firms to enter or leave the industry as they wish.

What is perfect information in the context of perfect competition?

Each firm is fully aware of the profits made by other firms, and consumers are aware of prices.

Why is the individual firm in perfect competition a price taker?

To accept the price as determined by market demand and supply forces.

What are supernormal profits (SNP)?

Profits in excess of normal profit, when average revenue is greater than average costs.

What is normal profit?

The minimum amount that must be earned to justify staying in business, when AR = AC.

What is a key feature of imperfect competition?

Product differentiation exists and firms can add different aspects to their products to attract customers, firms are price makers.

What makes markets contestable in imperfect competition?

Few barriers to entry, making markets relatively competitive.

How does differentiation create choice of goods in imperfect competition?

Product differentiation creates diversity of goods for consumers.

What is an oligopoly?

A market form in which the industry is dominated by a small number of sellers.

What is meant by interdependence between firms in an oligopoly?

Firms take into account the likely reactions of their competitors, leading to rigid prices.

What are some barriers to entry in an oligopolistic market?

Economies of scale, access to expensive technology, patents, trademarks, high setup costs, brand loyalty.

What is collusion in an oligopoly?

When firms agree to act together by increasing prices or restricting output.

What type of demand curve does a monopolist face?

The monopolist faces a normal downward-sloping demand curve.

What is a pure monopoly?

Where there is a sole supplier of a product, 100% market share.