Market Structures

What is a monopoly in market structure?

A market structure characterized by only one dominant firm that can set market prices.

What defines an oligopoly?

A market structure with a few large firms that have high barriers to entry and intense competition.

What characterizes monopolistic competition?

A market structure with many small firms selling slightly differentiated products, heavily relying on advertising.

What is perfect competition?

A hypothetical market where many firms sell an identical product, with perfect information and free entry and exit.

What is profit maximization?

The process of determining price, input, and output levels to achieve the highest profit.

What are implicit costs?

Opportunity costs associated with the risks and sacrifices made when starting a new business.

What are explicit costs?

Direct costs related to production, such as wages, rent, and materials.

What is the equation for total cost?

Total cost equals fixed costs plus variable costs plus opportunity cost.

How is total profit calculated?

Total profit is calculated as revenue minus total costs.

What is normal profit?

When total revenue equals total economic cost.

What is abnormal profit?

When total revenue exceeds total economic cost.

What are fixed costs?

Costs that do not change with the level of output, such as rent.

What are variable costs?

Costs that change with the level of output.

What is average cost?

Cost per unit of output, calculated as total cost divided by quantity.

What is marginal cost?

The cost of producing one additional unit of a good.

What does the law of diminishing marginal returns state?

Adding more of one input while holding others constant will eventually yield lower marginal returns.

What is marginal revenue?

The additional revenue generated from the sale of one more unit of output.

What is average revenue?

Total revenue divided by quantity, which equals price.

When does a firm break even?

When total revenue equals total costs.

When does abnormal profit occur in a costs and revenues diagram?

When average revenue is higher than average total cost.

When does a loss occur in costs and revenues diagram?

When average revenue is lower than average total cost.

What is productive efficiency?

Producing output using the least amount of resources at the lowest possible cost.

What is allocative efficiency?

A situation where marginal cost equals average revenue.

What are the characteristics of a perfectly competitive market?

Many small firms, perfect resource mobility, perfect information, identical goods, and free entry and exit.

How does perfect competition affect a firm’s profit?

Firms can earn short-term abnormal profits, but in the long run, they will earn no economic profit.

Why is perfect competition considered desirable?

It leads to lower prices and output, allocative efficiency in the short run, and productive efficiency in the long run.

What are the characteristics of a monopoly?

One large firm, no close substitutes, and strong barriers to entry.

What is interdependence in market structures?

A situation where firms rely on each other, affecting pricing decisions.

What is a cartel?

A group of businesses that collude to increase profits and dominate the market.

What is formal collusion?

Formal agreements among businesses to maintain high prices.

What is tacit collusion?

Informal agreements between businesses to avoid price wars without direct communication.

What is a non-collusive oligopoly?

An oligopoly where firms do not compete on prices due to the risk of price wars.

What defines a collusive oligopoly?

Firms in collusion that operate similarly to a monopoly.

What are the characteristics of monopolistic competition?

Many small firms, slightly differentiated goods, some price-setting ability, and high advertising.

What legislative measures can address market power abuse?

Prohibiting mergers that increase market share and limiting market share for large oligopoly firms.

What regulatory actions can be taken against market power abuse?

Investigating markets to prevent monopoly power from harming public interest, including licensing and inspections.

What is nationalization in response to market power abuse?

Government control of a private sector industry for the public's best interest.

What does equity refer to in economics?

The concept of fairness or evenness.

What is the stock market?

Markets where buying, selling, and issuance of shares of publicly-held companies takes place.

What is financial investment?

Buying assets in financial markets to earn a return.

What is industrialization?

Growth of the manufacturing sector while the agricultural sector shrinks and people move to cities.

What does the Kuznets curve illustrate?

Income inequality will worsen before improving during the process of industrialization.

Concentration ratio

The total market share that the biggest 3, 4 or 5 firms have. An oligopoly has 5 firms with more than 50% market share.