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Study Guide - Exam 3 The following
study guide is based primarily on the
instructor's notes and lecture topics. It does
not yet fully incorporate material from the
text book, Chapters 24, 25, and 26. So,
students should be careful to cover these
chapters on there own.
Perfect Competition Seven Necessary
Assumptions of the Model of Perfect Competition
1. Maximizing
Behavior
Utility &
Profit Maximization
Preference Ordering 2. Price-taking
Behavior
3. Unlimited number of small firms 4. No Barriers to Entry nor Exit 5. Perfect Information 6. Identical (or homogenous) products 7. Instantaneous and costless adjustments Six Outcomes or
Results of the Model of Perfect Competition
1. Efficiency
(Economic, Prodcutive, Allocative)
2. Social Optimality 3. Consumer Sovereignty 4. Uniqueness Barriers to
Entry/Exit
1. Patents,
copyrights
2. Natural 3. Technical 4. Legal 5. Political 6. Sociological The Increasing Concentration of Capital Market competiton
rewards the most efficient producers. By being
more efficient a producer lowers its production
costs. This allows it to either sell a product for
a lower price and gain market share (i.e. more
sales) or sell the product at the market price and
gain more profit. Either way the most efficient
firm ends up growing more rapidly than its less
efficient competitors. However. the most efficient
firms are not stupid, the very fact that they have
innovated more rapidly means that they know they
have to re-invest in new research and development
to continue their productivity advantage. But
because they have already grown more rapidly they
have more money to re-invest and therefore, are
more likely to to grow more rapidly in the next
period. Overtime the most efficient producer out
grows all other producers and dominates the
market. A competitive market has naturally
evolved into an uncompetitive monopoly. If you add
in the ability of large firms to lobby and
influence legislation their economic power now
transfers over to political power, and small
competitiors are at even a greater disadvantage.
Monopoly Price Discrimination
Efficiency gians/losses Monopolistic Competition Oligopoly The Four Firm
Concentration Ratio
Various Strategies
of Collusion and Anti-Competitive Activities
Cooperation
1. Collusion/Prce fixing 2. Price leadership 3. Prescribed market share Retaliaiton 4. Flooding the market 5. Predatory pricing 6. Price Wars Prisoners' Dilemma
Nash Equilibrium These questions refer predominantly to material from the lectures. Many of the questions can be addressed from the material in the text. 1.
Explain how a competitive market tends to generate
an “increasing concentration of capital”.
2. Know all of the assumptions of the Perfect Competition model, especially the 5 economic assumptions. Be able to explain the economic reason why each assumption is made. 3. Explain the assumption of price-taking behavior (or alternatively the assumption of a large number of small firms) in the model of perfect competition. Why must we make this assumption? 4. Explain the assumption of perfect information in the model of perfect competition. Why must we make this assumption? 5. Explain the assumption of no barriers to entry. Why must wemake this assumption? Explain 3 barriers to entry that actually exist in real markets. 6. What are 3 beneficial results or outcomes of the theory of perfect competition? 7. How are the results of the perfect competition model affected if any of the assumptions on perfect competition does not hold? 8. Explain 3 different anti-competitive strategies that firms use in the model of oligopoly. Give one example from lecture, one example from the text, 9. Explain the competitive strategy(s) that firms use in the model of monopolistic competition. Be able to give examples. 10. Advertising can improve the functioning of the market, or it can distort the market. First, explain how it can improve the functioning of the market. Second explain the role of advertising in generating imperfect markets (i.e. monopolistic competition)? |
Perfect Competition |
Monopolistic Competition |
Oligopoly |
Monopoly |
|
Number & Size of Firms |
unlimited number; very small; none has market power |
many; various sizes; each seeks mkt. power over a market segment |
very few; extremely large; each able to influence industry Q & P |
one; various sizes; total market power; sole dominance over industry |
Pricing Behavior |
price-takers. firm takes Prices, costs decides
Q to maximize profit. P =MR = MC = ATC |
each firm tries to gain monopoly pricing power
over a market segment via location, advertising, brand
name recognition, consumer loyalty. P maybe greater than or equal to ATC. |
oligopolistic firms have unlimited strategies;
can collude, go-it-alone, or damage each other. P maybe greater than, equal to, or less than ATC. |
price-maker; monopolist reduces Q to raise P
> ATC. |
Economic Profit |
zero economic profit. |
zero or positive economic profit |
positive, zero, or negative economic profit. |
positive economic profit. |
Barriers |
None |
Low |
High |
Highest |
Product |
Identical |
Differentiated |
Substitutes |
Unique |