ECON101: Test 3
Ch. 8, 9, 10, 11
Terms in this set (57)
What is market structure?
Market structure is best defined as the organisational and other characteristics of a market. We focus on those characteristics which affect the nature of competition and pricing - but it is important not to place too much emphasis simply on the market share of the existing firms in an industry.
What are the four market models?
Pure competition, Pure monopoly, Monopolistic competition, ffff
What are the characteristics of different market structures?
Pure competition: A very large number of firms; Standardized Product; No control over price; Conditions of entry are very easy, no obstacles; No nonprice competition; Examples include Agriculture
Oligopoly: Few firms, Standardized or differentiated products; Limited by mutual interdependence; considerable with collusion in control over price; Conditions of entry; significant obstacles; Nonprice Competition typically a great deal, particular with product differentiation; Examples include: steel, automobiles, farm implements, many household appliances
Pure monopoly: One firm. Unique; no close substitutes in products. Control over price is considerable. Conditions of entry are blocked. Nonprice competition is mostly public relations advertising. Examples include Local utilities.
What is pure competition?
It involves a very large number of firms producing a standardized product (that is, a product identical to that of other producers, such as cotton or cucumbers) New firms can enter or exit the industry very easily.
What are the requirements for pure competition
Very large number of competitive firms, standardize product, "price takers" - firms cannot change market price, it can only adjust to it.. an individual competitive producer is at the mery of the markets, lastly free entry and exit. no significant legal, technological, financial, or other obstacles prohibit new firm from selling their output in any competitive market.
How prevalent is pure competition?
It is relatively rare in the real world.
How does a competitive seller view the demand curve facing his/her firm?
The demand curve of a purely competitive firm is a horizontal line (perfectly elastic_ because the firm can sell as much output as it wants at the market price.
What pricing power does the competitive firm have?
Because each purely competitive firm offers only a negligible fraction of total market supply, it must accept the price determined by the market; it is a price taker, not a price taker.
What is total revenue, average revenue and marginal revenue for a competitive firm
Total Revenue: for each sales level is found by multiplying price by the corresponding quantity the firm can sell.
Average Revenue: Price per unit to the purchaser is also revenue per unit, or average revenue, to the seller.
Marginal Revenue: Its the change in total revenue that results from selling one more unit of output. In pure competition, marginal revenue and price are equal.
What is the relation among average revenue and marginal revenue?
MR and AR coincides with the demand curve
How can a firm maximize profits? What are the two approaches?
Because the purely competitive firm is a price taker, it can maximize its economic profit (or minimize its loss) only by adjusting its output. And, in the short run, the firm has a fixed plant. Thus it can adjust its output only through cahnges in the amount of variable resources (materials, labor) its uses.
The two approaches are: One method is to compare total revenue and total cost: the other is to compare marginal revenue and marginal cost. (p.180)
What is the marginal revenue-marginal cost approach? Does this rule apply only in competition or also in other market structures?
The second approach, the firm compares the amounts that each additional unit of output would add to total revenue and to total cost. The firm compares marginal revenue and the marginal cost of each successive unit of output. In the short run, the firm will maximize profit or minimize loss by producing the output at which marginal revenue equals marginal cost (as long as producing is preferable to shutting down) MR = MC Rule.... Can be restated P = MC
The rule is an accurate guide to profit maximization for all firms whether they are purely competitive, monopolistic, etc...
If a firm had a loss in the short run, when would it continue to operate and when would it shut down?
Under pure competition: we may substitute P for MR in the rule: When producing is preferable to shutting down, the competitive firm that wants to maximize its profit or minimize its loss should produce at that point where price equals marginal cost (P=MC)
Firms should shut down when the firm's average variable cost is greater than the price.
What is the supply curve for a competitive firm? What is the relationship of supply to the marginal cost curve?
Figure 9.6 on p. 187.
What is the link between diminishing marginal returns, marginal costs, and supply?
Because of diminishing returns, marginal costs eventually rise as more units of output are produced. And because marginal costs rise with output, a purely competitive firm must get successively higher prices to motivate it to produce additional units of output.
Higher product prices and marginal revenue encourage a purely competitve firm to expand output. As its output increases, the firm's marginal costs rise as a result of the law of diminishing returns. At some now greater output, the higher MC equals the new product price and MR. Profit once again is maximized, but at a greater total amount.
How is the market price determined in competition? Is this price then given to the individual firm?
p. 188` market equillibrium price will be the priec at which the total quantity supplied of the product equals the total quantity demanded. We first need to obtain total supply schedule and a total demand schedule .
Product price is given to the individual competitive firm, but the supply plans of all competitive producers as a group are a basic determinant of product price.
What happens in the long run in a competitive market? What is the long run profit in a competitive
In the long run firms already in an inustry have sufficient time either to expand or to contract their capacities. More important, the number of firm in the industry may increase of decrease as new firms enter or exisitng firms leave.
What types of adjustments occur to bring about the long run outcome? How are these adjustments related to the attributes of a competitive market structure?
A favorable shift in demand will upset original industry equilibrium and produce economic profits. But those profits will entice new firms to enter the industry, increasing supply and lowering product price until economic profits are once again zero.
What role does firm entry and exit play in the long run adjustment?
An unfavorable shift in demand will upset the original industry equilibrium and produce losses. But those losses will cause firms to leave the industry, decreasing supply and increasing product price until all losses have disappeared.
What are the long run outcomes in industries with constant costs, increasing costs, or decreasing costs?
Constant Cost Industry: Expansion or contraction will not affect resource prices and therefore production costs. Graphically it means that the entry or exit of firms does not shift the long-run ATC curves of individual firms. Long run industry supply curve is horizontal.
Most industries are increasing-costs industries: ATC curves shift upward as the industry expands and downward as the industry contracts
Decreasing cost industries: firm experience lower costs as their industry expands. PC as an example
What are the efficiency conditions associated with the long run competitive outcome, i.e., in terms of productive efficiency, allocative efficiency, and consumer and producer surplus?
Productive efficiency: requires that goods be produced in the least costly way.. in the long run, cure competition forces firms to produce at the minimum average total cost of production and to charge a price that is just consistent with that cost...
Allocative Efficiency: requires that resources be apportioned among firms and industries to yield the mix of products and services that is most wanted by society *least cost production at each level of output assumed) It is achieved when it is impposible to obtain any net gains for society by simply altering the combination of goods and services that are produced from society's limited supply of resources.
How do competitive markets accommodate change?
What distinguishes monopolistic market structure from competitive market structures?
What are the key elements in each market structure that produce the results they do?
What are barriers to entry?
What is the nature of the demand curve facing a competitive firm? Facing a monopolistic firm?
What are the implications of the nature of the demand curve for each of these two market
How do the marginal revenue curves in the two market structures differ?
How does the monopolist establish output to maximize profits? How do monopolist firms
In what sense is the monopolist a "price maker"?
Can a monopolist set any price it wants?
Do monopolist firms face an inelastic demand curve?
What is the nature of the supply curve for a monopolist?
Why are monopolists more likely to make an economic profit in the long run than a competitive
How does the price output outcome under monopoly differ from than under competitive
conditions? What are the efficiency implications of this outcome?
What are some of the cost complications involved in analyzing monopolist?
What is price discrimination?
What conditions are necessary for price discrimination to occur?
How might natural monopolies be regulated?
What are the market structure conditions for monopolistic competition and oligopoly?
What is product differentiation? What form does it take?
What distinguishes monopolistic competition from competition? What distinguishes oligopoly
How does market structure affect the demand curve for a monopolistically competitive firm?
How do monopolistically competitive firms establish profit maximizing (loss minimizing)
What is the long run profit potential for monopolistically competitive firms?
What is the long run profit potential for monopolistically competitive firms?
What are the efficiency conditions for MC firms?
What are capacity conditions for MC firms?
What are potential benefits of monopolistically competitive conditions?
What are market structure conditions for oligopoly?
How do oligopolistic firms view each other? What is different about this in oligopoly from other market structures?
What are concentration ratios? What is the Herfindhal index?
What is game theory? How does it apply to oligopoly?
What are the three variations of market outcomes for oligopoly?
What product differentiation occurs in oligopoly?
What is the role of advertising and nonprice competition in oligopoly?
What are the efficiency conditions for oligopolistic outcomes?