competitive markets and monopoly

• What is market structure?

  Market structure refers to the characteristics of a market that influence the behavior of firms and their interactions with consumers, including factors like the number of firms, product differentiation, and ease of entry or exit.
• What is the spectrum of competition in market structures?

  The spectrum ranges from perfect competition (many firms, identical products) at one end to pure monopoly (one firm, no competition) at the other.
• What are the types of market structures?

  Perfect Competition

  Monopolistic Competition

  OligopolyMonopoly
• What are the objectives of firms?

  Firms aim to maximize profits, but other objectives include survival, growth, quality, maximization of sales revenue, and increasing market share.
• What is the profit-maximizing rule?

  The profit-maximizing rule is Marginal Cost (MC) = Marginal Revenue (MR).
• What is the satisficing principle?

  The satisficing principle states that firms aim to achieve a satisfactory (not necessarily maximum) level of profit, meeting the needs of shareholders or managers.
• What is the divorce of ownership from control?

  The divorce of ownership from control occurs when the owners (shareholders) and managers are different, which can lead to conflicts of interest and affect the firm’s objectives and performance.
• What are the main characteristics of perfect competition?


  Many FirmsIdentical ProductsFreedom of Entry and Exit

  Perfect KnowledgeFirms in perfect competition are price takers and cannot influence market price.
• What are the implications of perfect competition for firms and industries?

  Perfect competition leads to allocative efficiency (P = MC) and productive efficiency (minimum average cost). In the long run, firms earn normal profit (zero economic profit).
• What is the diagrammatic analysis for perfect competition in the short and long run?

  In the short run, firms may make profits or losses. In the long run, new firms enter, pushing profits to zero, and firms operate where P = MC, ensuring efficiency.
• What are the main characteristics of monopolistic competition?

  Many FirmsProduct Differentiation Freedom of Entry and ExitFirms engage in non-price competition (advertising, branding) to differentiate their products.
• What is the diagrammatic analysis of monopolistic competition in the short and long run?

  In the short run, firms may earn profits. In the long run, the entry of new firms reduces profits to zero (normal profit), similar to perfect competition.
• What is oligopoly and its characteristics?

  An oligopoly is a market structure with few firms that dominate the market. It can feature product differentiation or homogeneous products and often has high barriers to entry.
• What is the concentration ratio in oligopoly?

  The concentration ratio measures the market share of the largest firms in an oligopoly. A high ratio indicates a more concentrated market.
• What is the difference between collusive and non-collusive oligopoly?

  • Collusive Oligopoly: Firms cooperate to set prices or reduce competition (e.g., cartels).
  • Non-Collusive Oligopoly: Firms independently set prices and compete, often using non-price competition.
• What is the kinked demand curve model in oligopoly?

  The kinked demand curve model explains price rigidity in oligopoly. If a firm lowers its price, others follow. If it raises its price, others don’t follow, causing a loss in market share.
• Why do firms in oligopoly engage in non-price competition?

  Firms in oligopoly use advertising, product differentiation, and innovation to compete without changing prices.
• What is monopoly and its characteristics?

  A monopoly is a market structure with one firm that controls the entire market. It faces high barriers to entry, such as patents, control of resources, or government regulation.
• What is monopoly power?

  Monopoly power is the ability of a firm to set prices above the market equilibrium due to barriers to entry, lack of competition, and control over the market.
• What are the advantages and disadvantages of monopoly?

  • Advantages: Economies of scale, potential for innovation.
  • Disadvantages: Higher prices, lower output, inefficiency, deadweight loss.
• What are the conditions necessary for price discrimination?

  Market Power Market SegmentationPrevention of Resale
• What are the advantages and disadvantages of price discrimination?

  • Advantages: Increased total revenue for firms, lower prices for some consumers.
  • Disadvantages: Some consumers pay more, leading to unfair outcomes and potential welfare losses.
• What is creative destruction?

  Creative destruction refers to the process where new innovations replace outdated products and firms, leading to long-term economic growth and dynamic efficiency.
• What are contestable and non-contestable markets?

  • Contestable Markets: Low barriers to entry and exit, with firms able to enter temporarily (hit-and-run competition).
  • Non-Contestable Markets: High barriers to entry, where incumbent firms have significant market power.
• What is static efficiency?

  Static efficiency refers to the efficiency in resource allocation at a particular point in time. It includes allocative efficiency (P = MC) and productive efficiency (producing at minimum average cost).
• What is dynamic efficiency?

  Dynamic efficiency refers to long-term efficiency achieved through technological progress, innovation, and investment in human and non-human capital.
• What is resource allocation and how does it differ across market structures?

  In different market structures, resource allocation varies. Perfect competition leads to efficient resource allocation, while monopolies may lead to misallocation (deadweight loss).
• What is consumer surplus?

  Consumer surplus is the difference between what consumers are willing to pay for a good and what they actually pay.
• What is producer surplus?

  Producer surplus is the difference between the price producers receive for a good and the minimum price they are willing to accept.
• How do monopolies affect consumer and producer surplus?

  Monopolies increase producer surplus but decrease consumer surplus, leading to deadweight loss, where total welfare is reduced.
• What is the relationship between market structure and efficiency?

  Different market structures lead to different levels of efficiency. Perfect competition leads to both allocative and productive efficiency, while monopoly often results in inefficiencies such as deadweight loss and lower output.
• What is the concept of allocative efficiency?

  Allocative efficiency occurs when resources are distributed in a way that maximizes total welfare, where the price of a good (P) equals the marginal cost (MC) of producing it. This ensures that goods and services are produced in quantities that consumers value most.
• What is productive efficiency?

  Productive efficiency is achieved when firms produce at the lowest possible cost, typically at the point where average cost (AC) is minimized. This occurs when firms are operating on the lowest part of their long-run average cost curve.
• How do firms in perfect competition determine price and output?

  In perfect competition, firms are price takers. They determine their output where Marginal Cost (MC) = Marginal Revenue (MR). The price is determined by the intersection of the industry supply and demand curves.
• What is the long-run adjustment process in perfect competition?

  In the long run, if firms in a perfectly competitive market are earning economic profits, new firms will enter the market. This increases supply, reduces prices, and drives profits down to zero, resulting in firms earning only normal profit.
• What is the impact of entry and exit in monopolistic competition in the long run?

  In monopolistic competition, if firms are making profits, new firms will enter, leading to a decrease in demand for each firm’s product. Over time, this reduces profits to normal levels (zero economic profit).
• What role does non-price competition play in monopolistic competition?

  Firms in monopolistic competition engage in non-price competition through advertising, branding, and product differentiation to distinguish their products and attract customers, as they have some degree of pricing power.
• How does price leadership work in an oligopoly?

  In an oligopoly, price leadership occurs when one firm, typically the dominant one, sets the price, and other firms follow suit. This reduces competition and allows the firms to maintain higher prices.
• What is the difference between cooperation and collusion in oligopolies?

  • Cooperation occurs when firms work together, usually informally, to maximize joint profits.
  • Collusion is when firms formally agree (often illegally) to fix prices or output, typically through a cartel.
• What are the disadvantages of a monopoly?

  1. Higher Prices: Monopolists can set prices above the competitive level.
  2. Lower Output: Monopolies restrict output to increase prices.
  3. Inefficiency: Deadweight loss occurs, reducing overall economic welfare.
  4. Consumer Exploitation: Consumers face limited choices and higher prices.