Show:
Perfect Competition
Monopolistic Competition
Oligopoly
Monopoly
100
What are the 5 assumptions made of a perfectly competitive market?
1) All Firms sell an identical Product 2) All Firms are Price Takers 3) Have a Small Market Share 4) Be up-to-date with a change in the product's value 5) No barriers to enter or exit the market.
100
At what point does a firm maximize profit?
Where MC = MR.
100
True or False. In an Oligopoly there is Interdependence?
True, a key feature that is common in all oligopolies is that there is interdependence.
100
Give as an example of brand loyalty, and one example an economy of scale.
Kleenex, Royal-Caribbean
200
At which point does the profit maximizing firm produce?
The firms will produce where marginal Cost is equal to marginal revenue, or where MC=MR at the level of output q.
200
Can a monopolistic competition make abnormal profit in the short-run? Illustrate with a graph.
Yes (Illustration of graph on the right).
200
Define Collusive Oligopoly.
Collusive oligopoly exist when the firms collude or agree to charge the same prices for their products, acting as a monopoly.
200
Draw a diagram representing a firm making abnormal profit.
(Observe the example to the right on the board).
300
Explain how a firm moves from short-run abnormal profits to long-run normal profits.
Due to the lack of barriers for entry in the perfectly competitive industry, other firms will be able to join the industry, which they will do as a result of the short-run abnormal profits. This will cause supply to increase and price to fall eventually, leading to normal profits.
300
What are the assumptions of a monopolistic competition?
The industry is made up of a fairly large number of firms, Brand Loyalty (price-makers), The firms all produce slightly differentiated products, There are no barriers to entry or exit.
300
Define Non-Collusive Oligopoly.
Non-Collusive oligopoly exists when the firms do not collude on prices, they just are aware of the reaction of other firms, due to price change.
300
What are 4 sources of monopoly power?
Economies of scale, Natural Monopoly, Legal Barriers, Brand Loyalty, Anti-Competitive Behavior.
400
When does a firm in a perfectly competitive market make short-run losses? Illustrate with a graph.
This happens when the firm sells at industry price P, but the cost C, as shown in the graph below, is greater than the price P at each unit, and therefore the firm is making loss equal to C-P. The firm, however, is still producing at a “profit maximizing”output, as change in the output would only result in greater loss.
400
Due to the low barriers of entry are the firms going to make a long-run or a short-run equilibrium? And what type of profit will the firm make as a result?
There will be a long-run equilibrium, and the firm will be making normal profit.
400
List four characteristics of an Oligopoly.
Differentiated or Homogeneous, High or low barriers to entry, Small number of dominant firms, Price rigidity, Collusive: Tacit, Formal, Agreement, Non-Collusive: No Agreement
400
Explain the possible problems associated with monopolies in comparison with perfect competition.
1.) They are productively and allocatively inefficient. 2.) They can charge a higher price for a lower level of output. 3.) They can exercise anti-competitive behaviour to keep their monopoly power.
500
Why is a firm with short run losses still considered to be producing at a profit maximizing output?
Because even though the firm is not covering its costs, changing its output would only result in a greater loss for the industry, and therefore they are maximizing profit, or minimizing losses.
500
Please draw the socially optimum level of output for a firm in the manner of a diagram.
(Observe example on the right of the board).
500
Draw the diagram for an Oligopoly market.
Watch the board on the right.
500
Using a diagram, explain the concept of a natural monopoly.
(Observe natural monopoly diagram to the right on the board).