3.4 Market structures

Question 1

list characteristics of perfect competition

Answer 1

-all firms are price takers
-high number of insignificant firms
-homogenous products
-low barriers to entry
-perfect info between firms

Question 2

where is the shut down point

Answer 2

where price = avc

Question 3

what do perfect competition firms achieve in the short run

Answer 3

super normal profits

Question 4

list the characteristics of monopolistic competition

Answer 4

-many buyers and sellers
-differentiated goods
-profit maximisation incentive
-low barriers to entry
-firms are price makers

Question 5

why will monopolistic competition firms earn normal profits in the long run

Answer 5

-S.N.P attracts new entrants to the market
-lots of new firms enter due to low barriers to entry
-new entrants lead to demands shifting left

Question 6

what is meant by concentration ratio

Answer 6

-the proportion of the market supplied by the largest firms in the industry

Question 7

what are the characteristics of an oligopoly

Answer 7

-high barriers to entry and exit
-high concentration ratio
-interdependence of firms
-product differentiation

Question 8

explain the reason for collusion

Answer 8

-to increase profits by agreeing to raise prices and reduce output

Question 9

what is tacit collusion

Answer 9

firms act individually and follow what the larger firms do to increase market share (accidental/unplanned collusion)

Question 10

what is overt collusion

Answer 10

formal secret agreement between firms to fix prices or rig bids for contracts

Question 11

how does a kinked demand curve show the concert of interdependence

Answer 11

-if a firm increases price they will face elastic demand
-if they decrease price they won’t gain enough customers to make up the difference

Question 12

what factors make collusion more likely

Answer 12

-high market concentration
-less market regulation
-product homogeneity

Question 13

what are the three pricing strategies

Answer 13

-price wars
-limit pricing
-predatory pricing

Question 14

explain the pricing strategy price wars

Answer 14

-when price cutting leads to retaliation and other firms also cut prices

Question 15

explain the pricing strategy limit pricing

Answer 15

-cutting prices to where you are just above the shut down point
-deters new entrants and existing firms from expanding

Question 16

explain the pricing strategy predatory pricing

Answer 16

-cutting prices below ac and sometimes avc for a short period of time
-done to force other firms out the market before raising prices again
-illegal

Question 17

what are the 4 main non-pricing strategies

Answer 17

-increase in advertising/branding
-increase in quality
-reliability
-loyalty gards/deals

Question 18

list characteristics of a monopoly

Answer 18

-high barriers to entry
-supernormal profits in the long run
-downward sloping demand curve
-company with at least 25% market share

Question 19

where do monopolies get their power

Answer 19

barriers to entry- no new entrants
location- no alternatives locally
product differentiation- no other firm produces a certain niche good
economies of scale- lowering production costs allows them to lower prices

Question 20

what are the features of a natural monopoly

Answer 20

-there are continuous economies of scale
-able to achieve lower costs than a situation with 2 firms
-one firm in the market
-consumers can’t pay monopoly price so gov forces them to sell at a loss and the gov. makes up the difference

Question 21

explainthe costs and benefits of a monopoly firm

Answer 21

pros: economies of scale (lower prices)
pricing power (larger profit margins)
fewer competitors (lower costs)

cons: lots of regulation (often investigated so they don’t exploit customers)
threats from foreign industry (lack of incentive to innovate)

Question 22

explain costs and benefits of a monopoly for consumers

Answer 22

pros: economies of scale (lower prices)
reinvestment of S.N.P (better quality, lower prices, increased output)
price stability for consumers

cons: high prices -> low output
consumers are ‘priced out’
are x-inefficient

Question 23

explain costs and benefits of a monopoly for employees

Answer 23

pros: better pay
better career progression
better job security

cons: lack of alternate employees
weak bargaining power
large firms can replace employees with machinery

Question 24

explain costs and benefits of a monopoly to a supplier

Answer 24

pros: regular order will be a big part of revenue
cons:weak bargaining power (forces to accept lower prices

Question 25

explain the conditions for price discrimination

Answer 25

-must be a price setter
-ability to separate markets
-PED must be different in different markets
-cost of keeping markets separate is less than the increased profits gained
-sufficient info