Flashcards
Firms & how they operate
Cards in this deck (18)
- 1What are the characteristics of a perfect competition?- Many sellers
- Homogenous products
- No market power
- Perfect knowledge
- No BTE - 2What are the characteristics of a monopolistic competition?- Many sellers
- Differentiated products
- Low BTE
- Imperfect knowledge - 3What are the characteristics of an oligopoly?- Significant BTE
- Few large firms
- Homogenous OR differentiated products
- Imperfect knowledge - 4What are the characteristics of a monopoly?- Significant BTE
- Sole seller
- No close substitutes
- Imperfect knowledge - 5What is the shut-down condition?TR>TVC : Continue production
TR = TVC : Indifferent between continuing production & shutting down
TR - 6What are the merits of perfect competition?- Productive efficient
(when output is produced using the least-cost combination of inputs with the given available technology)
- Allocative efficient
(when P=MC and society's welfare is at the max) - 7What are the demerits of perfect competition?- No incentive for innovation (dynamic inefficient)
- Lack of EOS - 8What is the performance of firms in a monopolistic competitive market?- Allocative inefficient
(more than Oligopoly & Monopoly)
- Partially dynamic efficient
(more than PC)
- Productive efficient
- Equitable due to LR normal profit - 9Why do firms collude in an oligopoly?It reduces uncertainty due to mutual interdependence. (cartel) Members behave as if they were a single firm by agreeing on the cartel price and output levels that would maximise the industry's profit levels.
- 10How do you explain the kinked demand curve?The demand curve is kinked due to mutual interdependence. The original price is at P0. When a firm increases its price above P0, no other firms will follow. Since there are cheaper substitutes, the demand for this firm's good becomes price elastic which will lead to a more than proportionate decrease in Qd of the good > TR decreases. When a firm decreases price, all other firms will follow. Since its good is not any cheaper compared to its substitutes, Dd for the good becomes price inelastic which leads to a less than proportionate increase in Qd of the good > TR decreases. Since any changes to the current P0 would lead to a decrease in TR, the oligopolistic firm has no incentive to change its price, resulting in price rigidity. When it faces an increase in MC, as long as it increases along the vertical discontinuous MR, then the firm will increase price to P2 & decrease output to Q2.
- 11What is price discrimination?It occurs when a producer sells a specific commodity to different buyers at different prices for reasons NOT associated with differences in cost.
- 12When is price discrimination possible?1. Market power; the seller must be able to have some control over the price
2. Different PED; The firm would charge a higher price to buyers whose demand is more inelastic.
3. Market segmentation; The seller must be able to segment the market into separate identifiable groups according to their different PED. - 13What is first-degree or perfect price discrimination?This is where the monopolist charges the maximum price that each consumer is willing & able to pay for EACH UNIT of the good consumed, resulting in zero consumer surplus.
- 14What is second-degree price discrimination?This is where the firm charges customers different prices for different BLOCKS of the same service, according to how much they purchase.
- 15What is third-degree price discrimination?The most common type where consumers are grouped intro 2 or more independent markets & a separate price is charged in each market.
(A higher price is charged in the market with a more inelastic demand vice versa) - 16What are anti-trust policies?It refers to programmes designed to prevent the deliberate creation of monopolies & to prevent dominant firms from engaging in anti-competitive practices.
- 17What is MC pricing?This is a pricing policy where the government requires production to occur at P=MC to achieve allocative efficiency. It forces firms to charge a price equal to marginal cost of production, which forces the monopoly to charge a lower price & produce at a greater quantity.
- 18What is AC pricing?This is a pricing policy where the government requires production to occur at P=AC. It aims to eliminate excess profits earned & hence reduce income inequity. It also aims to raise the monopoly's production of G&S to the highest level possible without causing the firm to incur a loss.
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- JC 2 Economics Flashcards on Firms & how they operate, created by FOOCHOOLA3 . on 13/08/2016.
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- FOOCHOOLA3 .
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