4.1.5 Perfect competition, imperfectly competitive markets and monopoly

Question 1

What is a pure monopoly?

Answer 1

A market in which there is a single seller

Question 2

What is a working monopoly?

Answer 2

Any firm with a market share of more than 25%

Question 3

What is an oligopoly?

Answer 3

A imperfectly competitive market or industry in which there is a high level of market concentration. Few firms have over 60% of market share

Question 4

What is a duopoly?

Answer 4

A market make up entirely or on the majority of two sellers

Question 5

What is monopoly power?

Answer 5

This occurs when the single supplier within a market or industry has the ability to independently influence the price of the a good or control the quantity supplied.

Question 6

In what ways can a monopoly occur?

Answer 6

By the government
Geographically
Integration

Question 7

What is supernormal profit?

Answer 7

When the amount of profit earned exceeds the amount needed to keep its resources in their present use (so TR>TC)

Question 8

How can monopoly be created geographically?

Answer 8

When one firm become the sole provider of a good or service in a local area or region

Question 9

How can monopoly power be created by the government?

Answer 9

The government provide a service that is widely accessible to the majority of the population and have the power the restrict any firms from entering that market

Question 10

How can monopoly power be created by integration?

Answer 10

In the case of vertical integration a firm can gain power of the production process and merge with firms in different stages of the supply chain
In the case of horizontal integration firms can generate a greater market share by joining together at the same stage of the production process

Question 11

What factors influence monopoly power?

Answer 11

Advertising
Number of competitors
Degree of product diff.
Barriers to entry and exit 
Consumer knowledge

Question 12

What are barriers to entry?

Answer 12

Factors that make it difficult or expensive for new firms to enter a market to compete with existent suppliers

Question 13

Give examples of barriers to entry

Answer 13

Brand loyalty
Lower costs (economies of scale)
Intellectual property
Legislation

Question 14

Perfect competition

Answer 14

A market structure that has a large number of buyers and sellers who have perfect information about the market, identical products and few, if any, barriers to entry.

Question 15

spectrum of competition

Answer 15

perfect competion,
 monopolistic, 
oligopoly, 
duopoly, 
monoply

Question 16

Features of Perfect Competition

Answer 16

large number of buyers and sellers
each frim sells an identitcal product
no firm can influence price - all price takers
no barriers to entry or exit
perfect knowledge

Question 17

What are the characteristics of perfect competition?

Answer 17

• Many firms
• Homogeneous products
• No barriers to entry
• Supernormal profit in short run not in long-run
• Price takers
• High economic efficiencies
• weak innovative behaviour

Question 18

What are the characteristics of an Oligopoly?

Answer 18

• Few dominat firms
• Differentiated products
• High Barriers to entry
• Short run and Long run supernormal profit
• Price makers but independent behaviour
• low allocative efficiency but scale economies
• high innovation behaviour

Question 19

What are the characteristics of a monopoly?

Answer 19

• One firm
• Branded product
• High barriers to entry
• Short run and Long run supernormal profit
• Price makers but constricted by demand curve and possible regulation
• Low allocative efficiency but echoes of scale and re- invested profits
• Risk of X inefficiency due to lack of competition

Question 20

Predatory pricing

Answer 20

selling a product below cost to drive competitors out of the market

Question 21

X-inefficiency

Answer 21

Occurs when a firm is not producing at the lowest possible cost for a given level of output, firm is operating within its average cost curve and not on the boundary

Question 22

A dominant firm

Answer 22

Has at least 40% market share

Question 23

What are the key advantages from a Monoply?

Answer 23

• profits used to fund investment and research
• natural monopoly - economies of scale
• domestic monopoly faces global competition
• monopolistic firms can be regulated
• price discrimination may help some consumers

Question 24

Collusion

Answer 24

when collective agreements are made, either formal or tactic, between firms that restrict competition

Question 25

Interdependence

Answer 25

where the decisions made by a business cannot be taken in isolation, it must consider the likely reaction of rival firms

Question 26

cartel

Answer 26

a formal organization of producers that agree to coordinate prices and production

Question 27

price fixing

Answer 27

an agreement among firms to charge one price for the same good

Question 28

when is price fixing easier?

Answer 28

• regulators are weak and ineffective
• penalties for collusion are relatively low
• participating firms have high percentage of total sales
• communication is good
• brands are strong so consumers will not switch demand

Question 29

why do many cartels break down?

Answer 29

• enforcement problems
• falling market demand
• successful entry of on-cartel firms
• exposure of price fixing

Question 30

sunk costs

Answer 30

costs that have already been incurred and cannot be recovered

Question 31

What are the main objectives of firms

Answer 31

Profit maximisation
Sales maximisation
Increased market share/market dominance
Social/environmental concerns
Profit satisficing
Survival

Question 32

Price discrimination

Answer 32

Price discrimination involves charging a different price to different groups of people for the same good. For example – student discounts,