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7 Cards in this Set
- Front
- Back
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Def of market structure |
This is the classification of different firms of the markets in accordance with certain characteristics such as: barrier to entry and exit Type of competition Type of products
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Name the main market structures |
1) perfect competition 2) monopoly 3) monopolistic competition 4) oligopoly |
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Def of perfect competition |
This is a theoretical market structure used as a benchmark to the real market structure such as monopoly and oligopoly |
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Features of perfect competition (6) |
ALL FIRMS ARE PROFIT MAXIMERS. They produce at pony where MC= MR 1) Infinite number of firms and sellers 2) Freedom of entry and exit; this will require low or no sunk costs. . These are costs that have been incurred and cannot be recouped. For example, if you spend money on advertising to enter an industry, you can never claim these costs back. 3) All firms produce an identical or homogeneous product. 4) All firms are price takers. Firms cannot influence market price of their products. Therefore it can only be determined by demand and supply of a product. Due to this, The demand curve for individual firm is said to be perfectly elastic because firms Firms do not have power to change price set for the market demand and supply and this may seem to sell a product at the particular price. 5) There is perfect information and knowledge. |
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Explain the diagram for long run perfect competition |
An individual firm will product at Q1, where MR=MC. At this equilibrium, we can examine the efficiency of the market.
1. Allocative efficiency occurs where P = MC. In this case, the firm will be allocatively efficient because at Q1 P=MC
2. Productive Efficiency. This occurs on the lowest point of the AC curve. This happens at Q1. This is because firms produce at the lowest point on the AC
3)Resources will not be wasted through advertising because products are homogenous
4. Normal profit means consumers are getting the lowest price. This also leads to greater equality in society |
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Explain the diagram for long run perfect competition |
An individual firm will product at Q1, where MR=MC. At this equilibrium, we can examine the efficiency of the market.
1. Allocative efficiency occurs where P = MC. In this case, the firm will be allocatively efficient because at Q1 P=MC
2. Productive Efficiency. This occurs on the lowest point of the AC curve. This happens at Q1. This is because firms produce at the lowest point on the AC
3)Resources will not be wasted through advertising because products are homogenous
4. Normal profit means consumers are getting the lowest price. This also leads to greater equality in society |
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Inefficiency in the perfect competition (2) |
1) No scope for economies of scale. This is because there are many small firms producing relatively small amounts. Industries with high fixed costs would be particularly unsuitable to perfect competition. This is one reason why perfect competition. is unlikely in the real world. It means firms cannot benefit from efficiencies of scale. 2) Dynamic efficiency? Lack of supernormal profit may make investment in R&D unlikely. This is important in an industry such as pharmaceuticals which require significant investment. Because there is a lack of investment, the firms may become static – there is no improvement in productivity and no reduction in costs over time; this makes them dynamically inefficient. |
