3.1 market structures

Assumptions of a monopoly

One firm in the industry

Controls price or output

Profit maximisation

Barriers to entry

Unique good or service sold

Barriers to entering a monopoly market

Legal

Ownership of a patent

Capital investment/startup costs

Brand proliferation

Advantages of a monopoly

Economies of scale

Guaranteed supply of product

Stable employment

Innovation

What does SPECS stand for

Super Normal Profits

Price

Equilibrium

Cost

Scarcity

Disadvantages of a monopoly

Higher prices

Inefficient

Lack of innovation

Loss making state monopolies

SPECS for a monopoly

Super normal profits are earned as average revenue exceeds average cost, this is because barriers to entry exist

Price is at P₁ and Produces at Q₁

Equilibrium is at E where marginal cost equals marginal revenue and marginal cost is rising

Cost is shown at C₁

Scarcity the firm is not making efficent use of scarce resources as it is not producing at the lowest point in the AC curve

Conditions needed for price discrimination

Some monopoly power

Separation of markets

Consumer price elasticity

Conditions needed in a consumer for price discrimination

Indifference

Ignorance

Attitude to the gods (e.g. snob goods)

First degree of price discrimination

Monopolists identify groups who are willing to pay more (e.g. doctors, lawyers) and charge higher prices. This is to eliminate consumer surplus

Second degree of price discrimination

Giving discounts to bulk buying

Third degree of price discriminatin

When monopolists identify groups with different PEDs and charge them accordingly (e.g. cinema tickets for students)

Regulation

Controlling of an activity by means of rules and legislation

Positives of regulation

Protects public welfare (e.g. safe working conditions)

Companies which break laws can be closed

Corrects market failures

Negatives of regulations

Impedes profitability (e.g. excess paperwork)

Net cost on society (adds to the cost of doing business)

Inefficient (takes time to implement)`

Deregulation

Removing barriers to entry for an industry

Positive effects for consumers of deregulation

Lower prices

Increased availability of service

Negative effects for consumers of deregulation

Decline in standards

Disruption to service (e.g. new industrial action)

Positive effects for employees of deregulation

New job opportunities with new suppliers

Negative effects for employees of deregulation

Reduced job security (may loose their jobs due to rationalisation)

Positive effects for firms of deregulation

Increased profits (if they expand their business to meet the new competition)

Negative effects for firms of deregulation

Decreased profitability (if they loose their market share and experience a loss of business)

Features of an oligopoly

Few sellers in the industry

Interdependence of firms (they do not act independently)

Product differentiation occurs

Barriers to entry exist

Aims of an oligopoly

Prevent government intervention in the market (they don’t want them earning SNPs)

maintain adequate profit levels

Barriers to entering an oligopoly market

High start up cost

Limit pricing (existing firms may have agreed to a low price)

Economies of scale in the market

Brand proliferation

Why consumers might prefer price competition

Lower prices

Higher disposable income

More choice

Why consumers might prefer non price competition

Stability in prices

Better quality commodities

Loyalty programs

Oligopoly demand curve

Kinked demand curve

SPECS of an oligopoly

Supernomal profits are earned as average revenue is greater than average cost, barriers to entry exist

Price is shown at P₁ and it produces at Q₁

Equilibrium occurs at G where marginal cost equal marginal revenue and marginal cost is rising

Cost is shown at point G

Price is sticky, if costs rise between points D&E then the market price will remain at P₁

Rigidity in price

Oligopolistic markets tend not to change their price as it would lead to a huge fall in revenue

Collusion

Rival sellers in the industry come together for mutual benefit

Explicit collusion

Separate companies jointly decide a specific course of action and form a cartel

Implicit collusion

No formal agreement exists between firms but they each recognise that joint profits would be higher if firms acted as a monopoly

Types of collusion

Reducing policies to stop new entrants joining the market

Sales territories

Implicit collusion

Advantages of an oligopoly for consumers

Price stability (non price competition)

Quality of product improves

Advantage of an oligopoly for firms

High profit levels

Changes in a market which allows a monopoly to become an oligopoly

Increased number of firms in the market

Removal of barriers to entry

Assumptions underlying imperfect competition

Many sellers in the industry

Differentiation occurs

Freedom of entry and exit

Firms attempt to maximise profits

Advantages of imperfect competition

Greater choice

Lower prices

Innovation

Disadvantage of imperfect competition

Inefficient (does not produce at lowest point on AC curve)

Excess capacity (less is produced as money is spent on ads)

Monopoly power (price exceeds marginal cost meaning it has monopoly power)

Ways product differentiation can be achieved

Branding

Product innovation

Competitive advertising

Why imperfect competition is wasteful

Inefficient use of resources (dont produce at lowest point on AC curve)

Competitive advertising (all firms take part in it, increases prices and pushes up costs)

Disadvantages of advertising for the consumer

Increased prices

Misleading information

Unnecessary pollution (e.g. leaflets)

SPECS of imperfect competition in the short run

Supernormal profits are earned as average revenue exceeds average cost

Price is shown at P₁ and the firm produces at Q^₁

Equilibrium is shown At E where the marginal cost equals marginal revenue and marginal cost is rising

Cost is shown at C₁

Scarcity, the firm is not making efficient use of scarce resources as they do not produce at the lowest point on the AC curve

SPECS of an imperfect competition in the long run

Supernormal profits are NOT earned as the firm earns normal profits because they are producing where average revenue is equal to average cost

Price is shown at P₂ and the firm produces at Q₂

Equilibrium is shown at point X where marginal cost is equal to marginal revenue and marginal cost is rising

Cost is shown at C₁

Scarcity, The firm is not making use of efficient resources as they do not produce at the lowest point on the AC curve

Assumptions underlying perfect competition

There are many sellers in the industry

Homogenous goods are sold

Freedom of entry and exit

Each firm attempts to maxamise profits

Reasons a firm in perfect competition do not advertise

Homogenous goods sold

Little additional revenue

Benifits the entire industry

Advantages of perfect compitition

Low prices

No advertising

Disadvantages of a perfect compitition

Little choice

No R&D

Price taker

A firm which must accept the price as set by the market

SPECS of an imperfect compitition in the short run

Supernomal profits are earned as average revenue exceeds average cost

Price is shown at P₁ and quantity Demanded is shown at Q₁

Equilibrium is shown at A where marginal cost equals marginal revenue and marginal cost is rising

Cost is shown at point C₁

Scarcity, firms are not making efficent use of scarce resources as they do not produce at the lowest point on the AC curve

SPECS of an imperfect competition in the long run

Supernormal profits are NOT, normal profits are earned as average revenue equal average cost

Price is shown at P₂ and quantity demanded at Q₂

Equilibrium occurs at point A where marginal cost is equal to marginal revenue and marginal cost is rising

Cost is shown at point A

Scarcity, The firm IS making use of scarce resources as it produces at the lowest point on the AC curve

Non SPECS perfect compitiion in the long run

Market supply curve shifts out to the right as more firms enter the industry

This causes the market price to fall

The individual firms demand curve falls, which forces the firm to lower its price (as they are price takers)

Firm will produce a smaller quantity

Amount of SNPs earned will continue to fall until they are eliminated

Only normal profits are earned

When should you use specs form an imperfect long run?

When you have NOT just awnsered a short run question

How perfect compitition benifits the consumer

Prices are kept to a minimum as no SNPs are earned

Firms produce at the lowest point on the AC curve encouraging low prices

How perfect competition benifits the economy

Economic resources of a country are maximised as they are being used in their most efficent manner

Factors of production in the economy are being used at their most efficent level meaning consumers are not overcharged (only normal profits)

Low concentration on the HHI

<1,500

Medium concentration on the HHI

1,500-2,500

Highly concentration on the HHI

>2,500