3.7

Question 1

The Four Market Structures

Answer 1

Perfect competition, monopolistic competition, oligopoly, and monopoly.

Question 2

How are market structures characterized?

Answer 2

Market structures are categorized by a few characteristics:
● Number of firms in the market
● Identical, differentiated, or unique products
● Whether firms are price takers or price makers

Question 3

Price Takers

Answer 3

Price Taker: Cannot influence price at all

Question 4

Price Makers

Answer 4

Price Maker: Can influence price to some degree

Question 5

Highly Competitive Structure

Answer 5

● Many firms
○ Competing for consumers’ business
● Low/no barriers to entry
● Identical/similar products

Question 6

Not Competitive Structure

Answer 6

● Few firms
● High barriers to entry
○ Prevent firms from entering and competing w/ each other
● Unique products

Question 7

High Levels of Competition

Answer 7

• Push prices down
• Influences firms to make high quality products
• Leaves consumers better off

Question 8

Low Levels of Competition

Answer 8

• Push prices up
• Allows producers to make low quality products
• Leaves consumers worse off

Question 9

Characteristics of Perfect Competition

Answer 9

● Many small firms
● Identical products (perfect substitutes)
● Low Barriers- Easy for firms to enter and exit the
industry
● Seller has no need to advertise
● Firms are “Price Takers”
Each firm has NO control over price.

Question 10

Characteristics of Monopoly

Answer 10

One large firm (the firm is the market)
* Unique product (no close substitutes)
* High Barriers- Firms cannot enter the industry
* Monopolies are “Price Makers”

Question 11

Barriers to Entry

Answer 11

A monopoly wouldn’t last long if there were not high barriers to keep other firms from entering.
Types of Barriers to Entry:
1. Economies of Scale
● Ex: There is only one electric company because they are the only ones that can make electricity at the lowest cost. This is a “natural monopoly”
2. Superior Technology
3. Geography or Ownership of Raw Materials
4. Government Created Barriers
● The government issues patents to protect inventors and forbids others from using their invention

Question 12

Characteristics of Oligopolies

Answer 12

Examples: Cell Phones, Service Providers, Cars * Few Large Producers (Less than 10) * Identical or Differentiated Products * High Barriers to Entry * Control Over Price (Price Maker) * Mutual Interdependence ■ Firms must worry about the decisions of
their competitors and use strategy

Question 13

Characteristics of Mono. Comp

Answer 13

Examples: Fast food, furniture, shoe stores *Relatively Large Number of Sellers *Differentiated Products * Some control over price * Low Barriers- easy for firms to enter *A lot of non-price competition (Advertising)

Question 14

Demand for Perfectly Competitive Firms

Answer 14

Why are they Price Takers?
* If a firm charges above the market price, NO ONE will
buy. They will go to other firms.
* There is no reason to price low because consumers
will buy just as much at the market price.
Since the price is the same at all quantities demanded,
the demand curve for each firm is…
* Perfectly Elastic (A horizontal straight line)

Question 15

Mr. DARP

Answer 15

For Perfect Competition:
Demand = Marginal Revenue and Average Revenue and Price
(MR=D=AR=P)

Question 16

Perfect Competition and Efficiency

Answer 16

• Perfect Competition forces producers to
  use limited resources to their fullest.
• Inefficient firms have higher costs and are
  the first to leave the industry.
• Perfectly competitive industries are
  extremely efficient

Question 17

Allocative Efficiency

Answer 17

Resources are used to produce goods society wants most, best mix of
goods
* Graphically where P = MC

Question 18

Productive Efficiency

Answer 18

• goods are produced in least costly way
• Graphically where P = minimum ATC

Question 19

Per-Unit

Answer 19

A PER UNIT tax or subsidy affects the VARIABLE COSTS so MC, AVC, and ATC will shift.
This WILL affect the quantity produced

Question 20

Lump-Sum

Answer 20

A LUMP SUM tax or subsidy only affects FIXED COSTS so only AFC and ATC will shift. MC stays the same.
This WILL NOT affect the quantity produced

Question 21

Shifting Cost Curves

Answer 21

A change in fixed costs changes ATC
and AFC (but not MC)
A change in variable costs changes
ATC, AVC, and MC

Question 22

In the long run…(Perfect Competition)

Answer 22

• Firms will enter if there is profit
• Firms will leave if there is loss
• So, ALL firms break even, they make NO
  economic profit
• (No Economic Profit = Normal Profit)
• In long run equilibrium a perfectly
  competitive firm is EXTREMELY efficient.