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Firms' Decisions - Coggle Diagram

- - - - Large number of firms
      - Homogeneous product
      - No barriers to entry
      - No barriers to entry
        
        Factors of production are perfectly mobile
        
        Fixed/sunk costs are minimal
        
        This lack of entry barriers hence accounts for the large no. of firms with insignificant market share
        
        Perfect knowledge
        
        Curtails price-setting ability of indiv firms
        
        Hence, the perfectly competitive firm is a price-taker: with insignificant market share and homogeneity of product sold, firm has no control over its price
        
        Demand curve for perfectly competitive firm is horizontal line as it is price-taker.
        
        For perfectly competitive curve: P = AR = MR
- - - - Refers to allocation of scarce resources that yields the right mix and quantities of goods and services to maximise society's welfare aka P=MC
    - - Achieved when resources are used to maximum capacity
      - Aka operating at Miminum Efficient Scale --> all internal ecoonomies of scale have been exploited aka ONLY MIN POINT of LRAC curve is productively efficient
    - - Refers to innovation arising from R&D --> dynamic as it takes place over time --> hence fall in unit cost at every level of output (increase productivity) and/or expand product range of firm (novelty & better quality)
      - Limitations: However R&D involves uncertainty as it explores unknown and untried --> inventions might not work out or be effective.
- - - - As a result of price setting ability, allows monopoly to restrict output to set a high price or even practise price discrimination.
    - - allows monopoly to retain supernormal profits in long run.
      - Lack of existing competition makes monopoly less willing to invest in R&D to further entrench market power
      - Cost barriers
        
        May require operating on a very large scale (high fixed cost) to reach minimum efficient scale and enjoy max internal economies of scale
        
        With lower unit cost due to economies of scale, can deliberately reduce price of products to ward off potential entrants (predatory pricing)
        
        AC and MC falls over very large level of output due to high TFC.
      - Artificial/institutional barriers
        
        Product differentiation
        
        Legal protection in the form of exclusive rights
        
        control of essential raw materials
    - - Consumers not fully aware of costs of production of product, tech used is closely guarded --> further increases their price-setting ability.
  - - - If TR>TVC then continue production
      - If TR=TVC then indifference
      - If TR<TVC then shut down
- - - - These firms each command large portion of market share and have strong market power - price setters.
      - measured by market concentration ratio MCR
      - Due to small number of competitors, large degree of mutual interdependence.
    - - Hence oligopolistic firms able to retain supernormal profits in long term
  - - - In a competitive oligopoly, a price cut by an oligopolist may cause its rivals to follow suit, so as to prevent the loss of customers to the first firm.
      - Hence this may result in a smaller rise in quantity demanded as customers may not switch over to them, leading to a fall in total revenue
      - Price Wars
        
        Price wars usually arise when there is considerable excess capacity in the industry. If rivals are successfully driven out of the industry, the firms that emerge victorious will get to gain a arger market share and greater market power.
        
        As losses in the short run are inevitable, price wars are thus not sustainable.
    - - Product differentiation
        
        Real physical differences (R&D)
        
        Imaginary differences through marketing techniques, advertising and packaging
        
        Differences in conditions of sale
      - Collusive Oligopoly
        
        formal or informal agreement on how to divide the market - increases profits of group as a whole
        
        agreed output quotas, fixed prices, limits on extent of product promotion or development, agreements not to poach each others' markets
        
        Formal: Cartels e.g. Organisation of Petroleum Exporting Countries OPEC
        
        This may lead to price wars, falling price and as a result cartel disintegrates. Hence these agreements tend to be fragile.
        
        While firms have strong incentive to cooperate to max joint profits, there is also incentive to cheat secretly.
        
        Informal: Tacit collusion (price leadership) e.g. when Comfort Delgro, a big player in the taxi business decides to raise its fares, other taxi providers will also follow.
- - - - MCR - Market concentration ratio
- - - - Demand for firm's products is relatively price elastic as there are a large no. of close substitutes
- - - - 1) Seller must have market power --> control over market supply
      - 2) Firm must be able to segment the market into clear, separate groups
      - 3) No seepage