3. Perfect competition, imperfectly competitive markets and monopoly

Question 1

Market structure

Answer 1

The organisation al and other characteristics of a market

Question 2

Entry barriers

Answer 2

Obstacles that make it difficult for a new firm to enter a market

Question 3

Exit barriers

Answer 3

Obstacles that make it difficult for an established firm to leave a market
e.g. highly specialised assets that are difficult to sell

Question 4

Natural barriers

Answer 4

Barriers that result from inherent features of the industry, such as economies of scale or high R and D costs; not barriers that have been artificially erected

Question 5

Sunk costs

Answer 5

Costs that have already been incurred and cannot be recovered

Question 6

Artificial barriers

Answer 6

Barriers erected by the firms themselves, such as high levels of advertising expenditure or predatory pricing

Question 7

Limit prices

Answer 7

Prices set low enough to make it unprofitable for other firms to enter the market

Question 8

Predatory prices

Answer 8

Prices set below average cost (or very cheaply) with the aim of forcing rival firms out of business

Question 9

Product differentiation

Answer 9

The marketing of generally similar products with minor variations or the marketing of a range of different products

Question 10

Divorce of ownership from control

Answer 10

The owners and those who manage the firm are different groups with different objectives

Question 11

Satisficing

Answer 11

Achieving a satisfactory outcome rather than the best possible outcome

Question 12

Monopoly

Answer 12

Only one firm in a market

Question 13

Static efficiency

Answer 13

Efficiency (productive and allocative) at a particular point in time

Question 14

Dynamic efficiency

Answer 14

Occurs in the long run, leading to development of new products and more efficient processes that improve productive efficiency

Question 15

Productive efficiency

Answer 15

The level of output at which average costs of production are minimised

Question 16

Allocative efficiency

Answer 16

Occurs when it is impossible to improve overall economic welfare by reallocating resources between markets. In the whole economy, price must equal marginal cost in every market

Question 17

Private costs and benefits

Answer 17

Private costs are costs incurred solely by an individual or firm as a result of their own activities; private benefits are benefits enjoyed solely by an individual or firm as a result of their own activities

Question 18

Social costs and benefits

Answer 18

Social costs are costs which fall on the whole of society: social cost = private cost + external cost; social benefits are benefits enjoyed by the whole of society: social benefit = private benefit + external benefit

Question 19

Monopoly power

Answer 19

Firms in market structures other than pure monopoly usually possess significant monopoly power, defined as power over price setting and other aspects of the market such as product differentiation

Question 20

Concentration ratio

Answer 20

Measures the market share (percentage of the total market) of the biggest firms in the market. For example, a 5 firm concentration measures the aggregate market share of the largest 5 firms

Question 21

Market conduct

Answer 21

The price and other market policies pursued by firms. This is also known as market behaviour, but is not to be confused with market performance, which refers to the end results of these policies

Question 22

Cartel

Answer 22

A collusive agreement by firms, usually to fix prices. Sometimes there is an agreement to restrict output and to deter the entry of new firms

Question 23

Price leadership

Answer 23

The setting of prices in a market, usually by a dominant firm, which is then followed by other firms in the same market. In barometric price leadership, one firm acts as a ‘barometer’ or benchmark, whose prices other firms follow

Question 24

Price agreement

Answer 24

An agreement between a firm, similar firms, suppliers or customers regarding the pricing of a good or service

Question 25

Price war

Answer 25

Occurs when rival firms continuously lower prices to undercut each other

Question 26

Price discrimination

Answer 26

Charging different prices to different customers for the same product or service, with the prices based on different willingness to pay

Question 27

Consumer surplus

Answer 27

A measure of the economic welfare enjoyed by consumers: surplus utility received over and above the price paid for a good

Question 28

Producer surplus

Answer 28

A measure of the economic welfare enjoyed by firms or producers: the difference between the price a firm succeeds in charging and the minimum price it would be prepared to accept

Question 29

Contestable market

Answer 29

A market in which the potential exists for new firms to enter the market. A perfectly contestable market has no entry or exit barriers and mp smile costs, and both new firms and incumbent firms have access to the same level of technology

Question 30

Hit and run competition

Answer 30

Occurs when a new entrant can ‘hit’ the market, make profits and then ‘run’, given there are no or low barriers to entry (including sunk costs)

Question 31

Deadweight loss

Answer 31

The name given to the loss of economic welfare when the maximum attainable level of total welfare is not achieved