4.Competitive and concentrated markets

Question 1

Define market structure.

Answer 1

The organisation of a market in terms of the number of firms and the way they behave.

Question 2

Define a price taker firm.

Answer 2

A price taker firm is one which accepts the market price set by the market conditions outside its control.

Question 3

Define a price maker firm.

Answer 3

A price maker is one which possess the power to set the market price.
Firms have monopoly power.

Question 4

5 factors of perfect competition.

Answer 4

• large number of firms in market.
• buyer and seller has perfect information.
• has no influence on price.
• has no/little product differentiation.
• low barriers of entry.

Question 5

5 factors of pure monopoly.

Answer 5

• one/couple of firms in the market.
• buyer and seller have little information.
• high barriers of entry.
• products are highly differentiated.
• has high influence on price.

Question 6

Define imperfect competition.

Answer 6

Any market structure lying between pure monopoly and perfect competition.

Question 7

Describe the competitiveness in a perfect competition structure and monopoly.

Answer 7

Most competitive in perfect competition.

Least competitive in monopoly structure.

Question 8

Describe a firms 2 main objectives and define 2 other objectives.

Answer 8

• profit maximisation- occurs when a firms total sales revenue is furthest above total cost of production.
• sales maximisation- occurs when level of output at which the sale of an unit of output would no extra revenue.
• growth maximisation.
• market share maximisation.

Question 9

How is price determined in a competitive market?

Answer 9

It is set by supply-demand equilibrium.

Question 10

Are profits likely to be higher or lower in a competitive market?

Answer 10

In the short-run firms profits are high (supernormal) because average revenue is greater than average costs, this then attracts new firms into the market, which leads to an increase in the market supply curve, causing market ruling price to fall, so the profits made by all firms will fall, meaning in the long-run profits are at normal profit level (AR=AC)

Question 11

What is a firms profits if AR>AC?

Answer 11

Supernormal profits.

Question 12

List 2 examples of perfectly competitive market.

Answer 12

• foreign exchange market.

- agricultural market.

Question 13

When will firms be allocatively efficient?

Answer 13

When P=MC.

Question 14

When will firms be productively efficient?

Answer 14

At the lowest point on the AC curve.

Question 15

Define consumer sovereignity.

Answer 15

When consumers dtermine what is produced in a market due to what they demand. Occurs in perfect competition.

Question 16

Define producer sovereignity.

Answer 16

When producers or firms in a market determine what is produced and what prices are charged. Occurs in monopoly structure.

Question 17

Describe the difference between pure monopoly and monopoly power.

Answer 17

In pure monopoly there is only one firm who controls the market, but monopoly power is when there is one dominant firm in a market with many firms, but they have ability to make higher profits.

Question 18

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Answer 18

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