Economics - Market structure (CHAPTER 6)
What is a monopoly?
A market structure with one seller and many buyers.
What is perfect competition?
A market structure with many sellers and buyers.
What is oligopoly?
A market structure with few sellers and many buyers.
What is monopolistic competition?
A market structure with many sellers and differentiated products.
Which market structure has the highest degree of market power?
Monopoly
Which market structure has the lowest barriers to entry?
Perfect competition
Which market structure is characterized by a single seller with complete control over price?
Monopoly
Which market structure encourages product differentiation?
Monopolistic competition
Which market structure is characterized by interdependent decision-making?
Oligopoly
What are the characteristics of a perfectly competitive market?
Many buyers and many sellers.
The goods are homogenious.
Free entry or exit of the market.
Perfect information.
Firms are pice-takers and the market determines the price.
How does a firm perceive the demand curve in a perfect competition?
The firm perceives a constant price in the increase of quantity demanded (horizontal line).
What is profit?
It is the result obtained by TR - TC, with TR = p.q.
What are two ways to analyze the profit and its optimization?
By looking at the total profit (TR - TC) or by the marginal analyse (MP = MR-MC).
What is marginal revenue (MR)?
The additional revenue obtained by selling one more unit.
What is marginal cost (MC)?
The cost obtained by selling one more unit.
What is marginal profit?
The profit obtained by selling one more unit, being the result of the subtraction MR - MC.
In which market structure, the MR = MC = p (market price)?
In perfect competition.
How do you find profit maximization?
By the formula: max. TII = TR -TC.
What is the marginal rule for finding the profit-maximizing quantity in the short run?
To expand output as long as MR is smaller or equal to MC.
In the long run, what happens to economic profit?
In perfect competition, people will enter the market as long as there is economic profit. This will result in the equilibrium price decrease and will end up till TP = 0.
In perfect competititon, if TP = 0, does it mean nobody earns anything?
No.
How do you derive the supply curve?
By drawing a marginal cost curve, in which every point of the supply curve is the point where MC crosses with MR (MC = MR = p) for different prices (above shutdown point in the short run and point of entry and exist in the long run).
What are the characteristics of a monopoly?
Only 1 seller and many buyers.
Good: 1, with no close substitutes.
Barriers to entry.
The firm is the price maker.
What are the barriers to entry for a monopoly?
Legal barriers (patents, copyright, franchises).
Economic barriers (natural barriers, economies of scale).
government created monopolies.
Control over an essential resource.
Deliberate (illegal) barriers (mafia type ruling over the territory and having on restaurant to reduce competitors).
What are public policies to regulate monopolies?
Anti-trust laws (decides if a monopoly will occur or not).
Regulation by the government.
Ownership (own a monopoly in public sector, so higher prices will not affect the people).
What are the characteristics of a monopolistic competition?
Many buyers and mand sellers.
Goods are differentiated (considered heteregious but with very close substitutes).
Free entry or exit.
Firms are price makers (own a degree of market power).
What are sources of product differentiation?
Advertising.
Brand names.
Product improvement.
Why do firms differentiate their product?
In order to sell at a higher price.
What is the difference in demand curve between the monopoly, oligopoly, and monopolistic competition?
The elasticity of the demand curve: monopoly (inelastic) to oligopoly (more elastic) to MP (more more elastic).
What are the characteristics of the oligopoly?
Few sellers and many buyers.
Goods are homogenious (petrol) or differentiated (cars).
Difficult entry and exit.
Firms are price makers (share a higher degree of market power).
What is specific to oligopolies?
Mutual interdependence.
Collusions.
Price leadership.
Incentives to cheat.
What is collusion?
It's an agreement between firms to determine a common price and quantities to produce in the market (price fixing).
Is OPEC a cartel?
Yes, it's an explicit collusion.
What's the difference between explicit and tacit collusion.
Tacit collusion happens without a formal written agreement, whereas explicit collusion involves direct formal agreements.
What's price leadership?
A form of collusion in which many sellers follow the price charges instituted by one seller.
What are public policies to regulate oligopolies?
Antitrust laws.
Regulation.
Sanction on collusions (punishment).