4:Competitive and concentrated markets

Question 1

Market structure

Answer 1

The organisation of a market in terms of the number of firms in the market and the ways in which they behave

Question 2

Price taker

Answer 2

A firm which passively accepts the ruling market price set by market conditions outside its control

Question 3

Price maker

Answer 3

A firm possessing the power to set the price within the market

Question 4

Perfect competition

Answer 4

A market that displays the 6 conditions of:

• A large number of buyers and sellers
• Perfect market information
• The ability to buy or sell as much as is desired at the ruling market price
• The inability of an individual buyer or seller to influence the market price
• A uniform or homogeneous product
• No barriers to entry or exit in the long run

Question 5

Competitive market

Answer 5

One in which firms strive to outdo their rivals, but it doesn’t necessarily meet all the conditions of perfect competition

Question 6

Concentrated market

Answer 6

A market containing very few firms, in the extreme only one firm

Question 7

Pure monopoly

Answer 7

When there’s only one firm in the market

Question 8

Monopoly power

Answer 8

The power of a firm to act as a price maker rather than as a price taker

Question 9

Imperfect competition

Answer 9

Any market structure lying between the extremes of perfect competition and pure monopoly

Question 10

Profit maximisation

Answer 10

Occurs when a firm’s total sales revenue is furthest above total cost of production

Question 11

Sales maximisation

Answer 11

Occurs when sales revenue is maximised

Question 12

Market share maximisation

Answer 12

Occurs when a firm maximises its percentage share of the market in which it sells its product

Question 13

Entry barrier

Answer 13

Makes it difficult or impossible for new firms to enter a market

Question 14

Exit barrier

Answer 14

Makes it difficult or impossible for firms to leave a market

Question 15

Consumer sovereignty

Answer 15

Through exercising their spending power, consumers collectively determine what is produced in a market. Strongest in a perfectly competitive market

Question 16

Producer sovereignty

Answer 16

Producers or firms in a market determine what is produced and what prices are changed

Question 17

Natural monopoly

Answer 17

The term has 2 meanings:

• When a country or firm has complete control of a natural resource
• When there’s only room in a market for one firm benefiting from economies of scale to the full

Question 18

Patent

Answer 18

A strategic or man-made barrier to market entry caused by government legislation protecting the right of a firm to be the sole producer of a patented good, unless the firm grants royalties for other firms to produce the good

Question 19

Natural barrier to entry

Answer 19

A barrier to market entry which isn’t man-made

Question 20

Artificial barrier to entry

Answer 20

A barrier to market entry which is man-made

Question 21

Informative advertising

Answer 21

Provides consumers and producers with useful information about goods/services

Question 22

Persuasive advertising

Answer 22

Attempts to persuade potential customers that a good/service possesses desirable characteristics that make it worth buying

Question 23

Saturation advertising

Answer 23

Through flooding the market with information and persuasion about a firm’s product, this functions as a man-made barrier to market entry by making it difficult for smaller firms to compete

Question 24

Product differentiation

Answer 24

Making a product different from other products through product design, the method of producing the product or through its functionality

Question 25

Quantity setter

Answer 25

A firm chooses the quantity of a good to sell, rather than its price. In monopoly, the market demand curve then dictates the maximum price that can be charged if the firm is to successfully sell its chosen quantity.

Question 26

Concentration ratio

Answer 26

A ratio which shows the total market share of leading firms in a market, or the output of these firms as a percentage of total market output

Question 27

Oligopoly

Answer 27

A market dominated by a few firms

Question 28

Resource misallocation

Answer 28

When resources are allocated in a way which doesn’t maximise economic welfare

Question 29

Collusion

Answer 29

Co-operation between firms e.g. to fix prices. Some forms of collusion may be in the public interest e.g. joint research and labour training schemes

Question 30

Invention

Answer 30

Creates new ideas for products or processes

Question 31

Innovation

Answer 31

Converts the results of invention into marketable products or services

Question 32

Price competition

Answer 32

Reducing the price of a good/service to gain sales by making it more attractive for consumers

Question 33

Limit pricing

Answer 33

Reducing the price of a good to just above average cost to deter the entry of new firms into the market. Prices are set at levels which are likely to make it unprofitable for potential entrants who might consider coming into the market

Question 34

Predatory pricing

Answer 34

Temporarily reducing the price of a good to below average cost to drive smaller firms or new market entrants out of the market