P3a. Perfect Competition and Monopolies
Supplementary Learning Materials - Videos, podcasts, ans schemes etc.
Transitioning from P1/P2 to P3 - the big picture
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This video attempts to give you a rationale about how we organised the knowledge within this market structure module.
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Spectrum of Market Competition
Thinking Framework: Structure - Conduct - Performance
Overview of Features (STRUCTURE) of Different type of Market Structure (Must view)
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It is important to recognise that firms in different market structures make different price and non-price decisions in order to achieve their objectives. As such, knowledge of the characteristics of the market structure that firms are operating in would help in better understanding the decisions that are made.
Market structure describes the important features of a market. Some considerations include
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Perfect Competition
Conduct(behaviour) of PC firms
- What is the firm's price and output decision?
- Is there price and non-price competition?
Performance of PC firms
We will examine firm's performance on:
- Profitability in short run and long run
- Efficiency (in terms of allocative and productive efficiency). For other types of market structure, we will also examine dynamic efficiency
- Equity
Long Run Equilibrium in Perfectly Competitive Firms
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Profits (p 23.3.5)
Why do PC firms only earn normal profits in the Long Run? |
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Efficiency (pg 23.3.6-8)
At the long run equilibrium, the PC firm will be producing at the minimum point of LRAC as can been seen in Fig 3 of p 23.3.6 in notes. This from society's point of view, there is productive efficiency in perfect competition. So at the outlet level Qe in Fig 3 representations optimum resource allocation. At this level of output, both productive efficiency and allocative inefficiencies are achieved. |
FAQ
Monopoly
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What are the different types of Barriers to Entry? |
Note that there aren't many pure single seller monopolies in real life. Most of the pure monopolies are natural monopolies. The monopolies we talk about in real life are what we call "near monopolies", i.e. they have a very dominant market share, e.g. Apple once had a 80 plus percent market share of the MP3 portable player market. Also note that a firm can be a near monopoly in one market, like Apple was with MP3 players, and in another market structure for other products/markets, e.g. Macbooks back in the 2000s. |
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Conduct
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Performance
Monopolies can
- retain its supernormal profits in the long run (unlike PC firms) as there are high barriers to entry.
Monopolies are
- Allocatively INEFFICIENT (P>MC)
- Productive efficient (only at firm's point of view). However, they are they are productively INEFFICIENT from society's point of view
- Furthermore, given that monopolist faces no competitor/rival, they can be X-INEFFICIENT. Note that in reality, many markets are contestable to a certain degree. This can reduce the possibility of X-inefficiency.
- Whether a firm has dynamic efficiency depends on whether it has incentive and financial ability to do so (i.e. supernormal profits in LR).
- Hence, IF the market is contestable, it is possible that monopolies can innovate and invest in R&D. We can the these monopolies have dynamic efficiency.
To find out more about Allocative efficiency - Marginalist Explanation
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Your seniors had some issue with the explanation in the notes, so we came up with another version.
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Answers to tutorial questions
for_bee_qn_6_and_7.docx |
section_b_data_response_question_updated_18_april.pdf |
Note that Qn (d) and (e) of DRQ (old syllabus type of qn) need evaluation, given that the command word is 'discuss'.
Answers for HCI TA2 Global aircraft case study is on Profit Max Page. Note that the answers are brief with stated evidence. You should answer with clear analysis, supported with evidence from case.
PC (market) vs Monopoly (single firm) comparison diagram (extra)
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This was taught to your seniors as a framework to illustrate how consumers are affected in terms of change in consumer surplus when market structures toggle between MORE COMPETITION (as represented by Perfect Competition as the extreme) and LESS COMPETITION (as represented by the pure monopoly as the extreme of no competition at all). This diagram can be used to answer N2004 DRQ on Market for Sugar part (c) since the qn is directly asking for the impact on consumer and producer surplus. But do note that PC is a benchmark for comparison. |
Complete Part 3b to achieve the following Learning Objectives
Concepts and Tools of analysis• Barriers to entry
• Market concentration ratio* • Market structures – Perfect competition, monopolistic competition, oligopoly, monopoly • Product differentiation • Competition versus collusion – Cartels, contestable markets • Efficiency – Allocative, productive and dynamic efficiency |
Learning ObjectivesFirms make decisions based on their objectives, costs and revenue conditions, rival firms’ actions as well as the business risks and uncertainty associated with each possible option.
• Types of barriers to entry include financial barriers, cost barriers (including economies of scale), control of raw materials, legal barriers and strategic entry barriers by rival firms. • It is important to recognise that firms in different market structures (perfect competition, monopolistic competition, oligopoly and monopoly) make different price and non- price decisions in order to achieve their objectives. As such, knowledge of the characteristics of the market structure that firms are operating in would help in better understanding the decisions that are made. • The application of market structure characteristics to real-world context is expected. o The defining characteristics include the number and size of firms, and the degree of interdependence among firms An awareness of the market concentration ratio (which could be defined as the percentage of total sales or production accounted for by the largest firms in an industry) and its calculation is sufficient. For example, the four-firm concentration ratio refers to the percentage of total sales or production accounted for by the four largest firms in the industry. • Diagrams consisting of AR, MR, AC and MC curves could be used to illustrate the pricing and output decisions in the different types of market structure. The derivation of costs and revenue curves is not required. • In explaining the characteristics of market structures, diagrammatic analysis of the comparison of the types of market structure is not required. Instead of comparing the diagrammatic derivation of market equilibrium price and quantity across market structures, emphasis should be placed on how the different characteristics of the market structure that firms are operating in influence the price and output decisions that firms make. • An understanding that producers make price and output decisions based on the following considerations is required: o Their firms’ (or their) objectives o Costs and revenue o Competitors’ actions o Business risks and uncertainty (e.g. unpredictable fluctuations in demand) • Technical analyses of competitors’ actions, and business risks and uncertainty are not required. Note: Students need to have a firm foundation of the different market structures to be able to apply the concepts to real life situations. While the perfect competitive model can be used as benchmark when assessing the relative performances of firms, students should understand that the ideal model does not exist in reality. The monopoly model can be used to analyse market power and price leadership. The collusive behaviour of firms leading to the formation monopoly should be discussed. The kinked demand curve should be used to explain why oligopolies avoid price competitions and often compete using non-price competitions (e.g. advertisement, product differentiation and product development etc.) Simplified diagrams consisting of AR, MR, AC and MC curves can be used to illustrate the different market structures. Comparison of firms’ performances on the basis of equity, innovation and choices are included to develop students’ higher order skills and to broaden their scope in the assessment of firms beyond output and prices. It would not be necessary to examine the technicality of efficiency when assessing the market performance of firms. |