A market could suffer from anti-competitive practices and abuse of market power by dominant firms, for example: - Artificial Entry Barriers. A firm may advertise a lot to increase the sunk costs and thus dissuade potential entrants from the market. - Collusion. Maybe...
Let’s assume Coca-Cola is making high profits, the following are some possible reasons why CocaCola is making these high profits:
A firm has many methods or strategies in which it may compete against rivals to increase its market share, revenue and/or profit:
A firm grows for three main reasons: 1) Market Power: A larger firm has more market share, a recognizable brand and market power to raise prices and earn higher profits. 2) Economies of Scale: A larger firm can benefit from economies of scale. For example, marketing,...
A monopoly seeks to price discriminate to increase profit. Price discrimination occurs when a firm charges different consumers different prices for identical goods. Assumptions: 1) Monopoly Power. The firm must control the price and supply of the good. 2) Different...
A concentration ratio measures the combined market share of the largest ‘N’ firms in an industry. A four firm concentration ratio of 97% is written: This means the largest 4 firms own a combined market share of 97%. A concentrated market is one in which a few large...
A monopsony is the only buyer in the market. Conditions for a monopsony: - The monopsony must have market power. - Sellers must not be able to sell their goods to buyers outside of their market. A monopsony will force its suppliers to charge the monopsony a low price....
A) Allocatively Inefficient. Monopolistically competitive firms are always (short-run and long-run) allocatively inefficient because they set , they do not produce what consumers want or the quantities demanded. B) Productively Inefficient....
Assume a duopoly in the soft drinks market with Coca-Cola and Pepsi the only two firms. Should Coca-Cola and Pepsi spend $100 million on a TV advertisement or not? If both Coca-Cola and Pepsi do not advertise then they make $100 million more profit because they save...
Assume The Joker and Mr Freeze robbed a bank together and have been caught by Batman and Gotham City’s police. Batman is interrogating The Joker and Mr Freeze in separate rooms, The Joker and Mr Freeze cannot communicate at all. Should The Joker and Mr Freeze confess...
Assume the US and USSR are in the Cold War. Should each country make some nuclear missiles to defend themselves against the other? If both the US and USSR disarm they benefit by saving $10 billion each because they do not have to research into new missiles or maintain...
Assume Kim Kardashian and Angelina Jolie spend 30 minutes each day applying their own make-up. Should Kim and Angelina apply make-up or should they use no make-up at all? Let’s say if Kim and Angelina stopped using make-up they receive a payoff of 30 because they do...
An oligopoly is a market where there are a few large dominant firms and each firm’s actions affect each other. Examples of oligopolies include banking, supermarkets, car manufacturers and OPEC. Assumptions: 1) A few large firms dominate the market. Many small firms...
Perfect competition is a theoretical ideal where all firms are price-takers, earn normal profit and are allocatively and productively efficient in the long-run. Perfect competition is a purely theoretical model, it does not exist in reality. Perfect competition...
A contestable market is one in which there are little (or no) barriers to entry or exit, entry/exit costs are low (or zero) so the threat of potential competition is high. Also, firms do not collude and there is perfect information (so all incumbent and potential...
Productive efficiency occurs when a firm is on the minimum point of its AC curve. Output is being produced at the lowest possible average cost. The firm is using the least amount of inputs to produce a given level of output. An economy is productively efficient if it...
A firm is X-inefficient if it does not minimize costs. A monopoly in an uncompetitive and incontestable market has no current or potential threat to its market power and super-normal profit. Workers and managers will relax more at work and put in less effort because...
Pareto efficiency occurs when the only way to make one person better off is to make another worse off
A barrier to entry is a factor blocking or disincentivizing a new firm from entering a market. Barriers to entry allow incumbent (existing) firms to block the entry of new firms, maintain their own market share/power and keep earning super-normal profit. Many entry...
Allocative efficiency occurs when a firm produces at . Resources are used to produce what consumers want and in the quantities demanded. Basically, consumer surplus is maximized. If good X’s then X is under-consumed, there is lost consumer surplus so there is...
Profit is the difference between revenue and costs. Maximizing Profit Profit maximization occurs at . Before Q*, so producing more output will increase total profit. At Q* profits are maximized. After Q*, so producing more output will decrease total profit....
A larger firm becomes more productive and lowers average costs in the long-run through economies of scale. Economies of scale makes a firm’s short-run cost curve shift down in the long-run. Remember the short-run is that period of time in which at least one factor of...
Revenue is money earned by a firm for selling its output. Total Revenue Total revenue (TR) is the total money earned by a firm for selling its output. As price falls and output rises, TR rises, reaches a maximum point and then falls. TR is zero at the origin because ....