2281 · 3.8
Market structure flashcards
Revision flashcards for Cambridge 2281 Market structure (syllabus 3.8). Flip, recall, then mark a real past-paper question.
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Features of perfect competition?
Many firms, homogeneous product, free entry/exit, perfect information, price taker (horizontal demand for individual firm).
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Long-run equilibrium in perfect competition?
P = MC = min AC — normal profit only (AR tangent to AC). Productive and allocative efficiency achieved.
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Why is MR below AR for a monopolist?
To sell more, the monopolist must lower price on all units. MR = P + Q(ΔP/ΔQ); for linear demand, MR has twice the slope of AR.
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Monopoly and allocative efficiency?
Monopolist produces where MC = MR with P > MC — underproduces relative to social optimum → allocative inefficiency (DWL).
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Kinked demand curve (oligopoly)?
Assumes rivals match price cuts but not price rises → demand more elastic above current price, less elastic below → price rigidity.
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Monopolistic competition long run?
Free entry erodes supernormal profit → tangency of D and AC with D downward sloping → excess capacity (output < min AC).
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What is product differentiation?
The process of distinguishing a product or service from others to make it more attractive to a particular target market. This can be through branding, quality, design, or packaging. It is the key feature of monopolistic competition.
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Define 'barriers to entry'.
Obstacles that make it difficult or impossible for new firms to enter a market. Examples include patents, high start-up costs, economies of scale, and brand loyalty.
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What does it mean for a firm to be a 'price taker'?
A firm that has no power to influence the market price and must accept the prevailing price. This occurs in perfect competition where the firm's individual output is insignificant compared to the total market.
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What is interdependence in the context of an oligopoly?
A situation where the decisions of one firm (e.g., on price or output) directly affect the profits and choices of its rivals, prompting a reaction. This leads to strategic behaviour.
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What is a natural monopoly?
A market situation where a single firm can supply the entire market at a lower average cost than two or more firms could. This is typically due to extremely high fixed costs and massive economies of scale, e.g., water supply or national grids.