4.1

• List the 4 types of market structures

  • monopoly
  • oligopoly
  • perfect competition
  • monopolistic
• What is the main goal of a monopoly

  profit maximisation
• Do monopolies face high or low barriers to entry

  high barriers to entry
• How much of the market share must a firm have in order to gain monopoly power?

  25%
• How do economies of scale help monopolies maintain their market share?

  It gives incumbents a cost advantage, so they can offer consumers lower prices
• How does limit pricing work

  Firms will offer their goods at prices below their production costs, so new entrants cannot enter the market and gain the profit
• What does it mean if firms are interdependent

  the actions of one affect the actions of all others
• How high are barriers to entry in a imperfectly competitive market

  low barriers to entry
• Do firms have market power in imperfectly competitive markets

  firms have relatively low market power
• Are firms price makers or takers in perfect competition

  price takers
• Is there a degree of product differentiation in perfect competition

  no, products are homogenous
• What is the main objective of perfectly competitive firms

  short-run profit maximisers
• What happens to market saturation as firms start to make more

  new entrants start joining the market due to the new profit motive, thus making the market more saturated
• Draw 2 graphs representing short run supernormal profits in a perfectly competitive market


  ...

  
• Why is this supernormal profit only in the short run

  new entrants will join the market, attracted by the extra profit, thus shifting supply outwards and reducing that supernormal profits
• Are they any economies of scale in perfectly competitive markets

  NO
• Describe price skimming

  When a new, unique product enters the market, so the price of it is set high before new entrants create their own versions
• Describe price penetration

  when goods are initially given a low price in order to attract consumers and boost customer loyalty
• What price is a good with a high PED most likely to have

  a low price, because quantity demanded is more sensitive to price changes
• what is a contestable market

  market that face actual and potential competition
• what is productive efficiency

  when firms operate on the lowest point on their average cost curve
• what is hit and run competition

  occurs when firms enter the market, take up supernormal profits and then exit
• why are firms in contestable markets constantly innovating

  so they don't lose market share or profit with the arrival of new firms into the market
• how do low barriers to entry affect contestability

  low barriers to entry increase contestability
• how does consumer loyalty affect elasticity of demand

  makes good more PED inelastic
• how do you calculate the concentration ratio of the top firms in a market

  add together the proportion of market share of these top firms
• how does collusion affect price and consumer surplus

  usually results in a increase in price and decrease in consumer surplus
• why is there less likely to be collusion when there are many firms

  easier for firms to get caught by regulatory bodies
• how does tacit collusion differ from overt collusion

  tacit collusion occurs when there is no formal agreement, whereas overt involves formal agreements
• how does price leadership increase price stability

  if the dominant firm changes their price, all other firms will most likely follow suit else they risk losing market share
• which uk industry are always in price wars

  the uk supermarket industry
• what are sunk costs

  unrecoverable costs
• what is game theory used to predict in oligopolies

  used to predict the outcome of a decision of one firm when they have imperfect information about their competitor
• what is the Nash equilibrium

  optimal strategy for all firms in a oligopoly
• how could supernormal profits yield positive externalities

  by investing these supernormal profits into R+D to increase productivity
• how do supernormal profits benefit the government

  it increases tax revenues
• define price discrimination

  when a firm charges different prices to different consumer groups for the same good/service
• how does price discrimination benefit monopolies

  it maximises their profit potential
• how does first degree discrimination differ from third degree

  first degree involves charging individual consumers different prices, whereas third degree involves charging consumer groups different prices
• how price discrimination be dangerous for firms

  they could face regulatory scrutiny by the competition and markets authority (CMA)