1.4. Competitive and Concentrated Markets

• There is a range of market structures:

  • perfect competition
  • oligopoly
  • monopolistic competition
  • monopoly

  these are distinguished by;

  • number of firms in the market
  • degree of product differentiation
  • ease of entry
• • the most important objective of most firms is profit
  • other objectives include; survival, growth, increased market share etc

  profit maximisation occurs when MR = MC

  • marginal revenue - extra revenue gained when selling 1 extra product
  • marginal costs - extra cost gained when producing one extra product
  • profit satisficing is a level below profit maximisation that satisfies the needs of owners or managers of an organisation
• sales maximisation - selling as much products as possible. Where AR=AC

  revenue maximisation - maximising the money coming into a business. Where MR=0
• Types of businesses include:

  • government businesses - looking to supply a service
  • worker cooperatives - looking to benefit their members
  • producer cooperatives - might look to gain economies of scale with smaller firms joining together
• Assumptions of a perfectly competitive market:

  • many buyers and sellers all in contact with each other
  • buyers and sellers have complete and perfect market information
  • firms are free to enter and leave the market whenever they want
  • all firms produce a homogeneous product
  • firms cannot by their own actions influence the ruling market price
  • firms can sell as much as they wish at the ruling market price
  • price takers (have to sell at the market ruling price)
• the main characteristics of a perfectly competitive market are;

  • markets are saturated (lots of competition)
  • products are homogeneous
• • normal profit - the minimum amount an owner expects to make to continue operating
  • supernormal/abnormal profit - profits above normal profit
• Short run supernormal profit:

  • profit maximisation occurs where MR = MC
  • productive efficiency occurs where AC = MC
  • allocative efficiency occurs where AR = MC

  A) costs/revenue

  B) quantity

  C) P = MR = AR = D

  D) AC

  E) MC

  F) supernormal profits

  
• Short run loss:

  • profit maximisation occurs where MR=MC
  • productive efficiency occurs where AC=MC
  • allocative efficiency occurs where AR=MC

  A) costs/revenue

  B) quantity

  C) P=MR=AR=D

  D) AC

  E) MC

  F) Loss

  
• Long run normal profits:

  • profit maximisation occurs where MR=MC
  • productive efficiency occurs where AC=MC
  • allocative efficiency occurs where AR=MC

  A) costs/revenue

  B) quantity

  C) P=MR=AR=D

  D) AC

  E) MC

  
• • for perfectly competitive markets, in the short run, supernormal profits are made which incentivises firms to enter. As more firms enter, it becomes more competitive, so price falls. This causes a loss to be made which makes firms want to leave. This cycle repeats in the short run.

  As the market transitions to the long run, normal profits are made. Now there is no incentive to enter or exit so it remains the same.

  in the short run, there is allocative efficiency. In the long run there is allocative and productive efficiency
• pure monopolies own 100% of the market

  legal monopolies own a minimum of 25% of the market

  monopolies exist from;

  • the growth of a business
  • amalgamation, merger or takeover
  • acquiring a patent or licence
  • through legal means - i.e. royal charter, nationalisation
• features of firms with monopoly power include;

  • a single firm controls over 25% of the market
  • products are differentiated
  • firms can generate profit above the normal level in the long run
  • there are high barriers to entry
  • firms are price makers
• concentration ratio: the proportion of the market held by the top X number of firms
• Monopolies lead to higher prices and lower outputs which may result in the misallocation of resources, leading to market failure

  Benefits of monopolies include

  • economies of scale
  • more money can be devoted to research and development to invent and innovate
• consumer and producer surplus:

  • A+B+D = consumer surplus
  • C+E = producer surplus
  • consumer surplus is the difference between the actual selling price of a product and the price that a consumer is willing to pay for it
  • producer surplus is the difference between the actual selling price of a product and the price that a producer is willing to sell it for

  A) price

  B) quantity

  C) demand

  D) supply

  
• competition may lead firms to strive to improve;

  • products
  • reduce costs
  • improve the quality of the service provided

  many large firms compete vigorously with each other but monopoly power may lead to consumers being exploited
• barriers to entry in monopolies may include:

  • capital costs (total capital needed to enter the market)
  • legal barriers
  • anti-competitive practices
  • sunk costs (costs that cannot be recovered)
  • scale economies (some industries have large economies of scale)
• Loss for a monopoly:

  • profit maximisation occurs where MR=MC
  • monopolies are nether productively efficient or allocatively efficient

  A) cost/revenue

  B) quantity

  C) P=AR=D

  D) MR

  E) AC

  F) MC

  
• Supernormal profit for a monopoly:

  • profit maximisation occurs where MR=MC
  • monopolies are neither productively efficient or allocatively efficient

  A) costs/revenue

  B) quantity

  C) P=AR=D

  D) MR

  E) AC

  F) MC

  G) supernormal profit