3.4 Market Structures

Question 1

Perfect Competition

Answer 1

Many Sellers
Identical Costs
Sell same/ very similar products
No entry or exit barriers
Perfect knowledge of the market
All firms are price takers
Normal profit for all firms in the long run
Short run losses or economic profit possible

Question 2

Monopolistic Competition

Answer 2

Imperfect competition
Large no. sellers
Selling similar/ differentiated products
Firms are price makers
Low barriers to entry and exit
Economic profit/ loss can be made in SR
Normal profits made in Long run (BE)
Productively and Allocatively inefficient

Question 3

Similarities between Monopolistic and Perfect Competition

Answer 3

Lots of firms
Small in size
Low entry and exit barriers
Economic profit in SR
Normal Profit in LR
High levels of competition

Question 4

Differences between monopolistic and perfect competition

Answer 4

Identical vs Differentiated products
Perf- Price determined by mkt, Mon- Price determined by firm
PC- Allocatively and productively efficient MON- NOt

Question 5

Oligopolistic Competition

Answer 5

Dominated by no. small firms
High conc. ratio
Firms will be massively affected by how other firms set price and output
Differentiated products- similar but not identical
Dominant firms make economic profit EVERY YEAR
Try to avoid price competition
Changes in ATC doesn’t change output

Question 6

Why do firms not compete by price in and oligopolistic market

Answer 6

They could enter price war BUT they’d see little gain in sales- whilst lowering price to follow competitors
This will lower their profit, which they will aim not to do as most firms will try for profit maximisation

Question 7

Examples of non price competition

Answer 7

Better quality customer service
Longer opening hours for retailers
Discounts on product upgrades when they become available in the mkt
Develop brand loyalty through advertising and promotions
Variation in design, style, service, quality of product

Question 8

Why may all Oligopolies not be bad?

Answer 8

Economies of scale
Greater innovation
Stability to the market- supply still remains if smaller businesses go bust
Offers employment
Supports public sector

Question 9

Price wars in Oligopolistic mkt

Answer 9

Firms repeatedly cut prices over time

Question 10

Predatory Pricing

Answer 10

When a firm deliberately tries to push prices low enough to force rivals out of the market

Question 11

Limit Pricing

Answer 11

Set prices low and high output, indicating to outside firms they cannot make a profit at that price if they enter

Question 12

Possible barriers to entry to entering a market

Answer 12

Econ of scale
Geographical barriers
Brand loyalty
Pricing
Legal Patents
Knowledge and expertise
Tech and capital requirements
First mover

Question 13

Price Discrimination

Answer 13

When firms charge different prices to different people based upon different characteristics

Question 14

Monopoly

Answer 14

Pure Monopoly= Large firm dominating the market
Very low levels of competition
High barriers to entry
Economic profit in the long and short run
Allocatively and productively inefficient

Question 15

Benefits of Monopoly

Answer 15

Economies of Scale due to size
Dynamically efficient
May still compete fiercely on price, quality and service
Can choose to be efficient
International Competition- UK Monopoly will need power to compete with other countries

Question 16

Allocatively Efficient

Answer 16

AR=MC
Producing whats demanded at a price that reflects the marginal cost of supply

Question 17

Dynamic Efficiency

Answer 17

Ability to earn supernormal profit in the LR and then reinvest it to further grow in LR

Question 18

Productive Efficiency

Answer 18

Maximising production and minimising costs
Working at lowest point on ATC

Question 19

X-Ineffciency/ Efficiency

Answer 19

Lack of competition, you have less pressure to be efficient and are inefficient as a result

Question 20

Sunk costs

Answer 20

Costs that cannot be recovered if a business decides to leave a market e.g. Redundancy, Penalty costs on leasing, Asset write offs

Question 21

Contestable market- freedom with entry and exit

Answer 21

No/ low sunk costs
Little regulation
Easy access to raw materials and skilled labour
Good knowledge and access to existing technology
No barriers to entry/ exit
Pool of businesses waiting to enter the market
No brand loyalty

Question 22

Monopsony

Answer 22

Single buyer in the market
Can be a single buyer of labour or of a product
Significant buying power in the market
Profit maximise where MCL= MRP
Assume many sellers of the product or of labour
e.g. NHS, education, Defence

Question 23

Government intervention in Monopsony

Answer 23

Fines from regulator
Laws/ regs
Price regulation- min pricing
Wage regulation- min wage
Block mergers or takeovers that increase monopsony power
Promote new entrants into the market
Reduce barriers to entry