05 Market Failure: Core Concepts

Question 1

Define Market Failure.

Answer 1

Occurs when the free market results in a misallocation of resources.

Question 2

Define a Pure Monopoly.

Answer 2

A single seller. It is rare for a firm to have a pure monopoly - except when the industry is state-owned.

Question 3

Define a Legal Monopoly.

Answer 3

A working monopoly - any firm with greater than 25% of total sales.

Question 4

Define a Duolopy.

Answer 4

Two firms take the majority of demand.

Question 5

Define an Oligopoly.

Answer 5

Characterised by the existence of a few dominant firms, each had market power and improves it position over time.

Question 6

Why do economists like competition?

Answer 6

• Dynamic efficiency - investment in better quality - long-term - they are using profits to invest in future, and better quality, products
• Productive efficiency - low costs - businesses have an incentive to reduce costs as much as possible
• Allocative efficiency - low prices and many choices (consumer preferences) - Low prices and choices will increase demand

Question 7

Define a market share.

Answer 7

A percentage of total sales in a market made by one firm.

Question 8

Define concentration.

Answer 8

The extent to which particular markets are dominated by a few firms.

Question 9

Define the n-firm concentration ratio.

Answer 9

The collective market share of the largest firms in an industry.

Question 10

4 Firms and there market shares:
A - 25%, B - 10%, C - 15%, D - 20%
What is the concentration ratio?

Answer 10

4:70