Ch 7. Market Failure and socially undesirably outcomes III (Market Power)

Question 1

Market Power

Answer 1

The control that a seller may have over the price of the product it sells. It is the ability of a firm to charge P>MC

Question 2

Perfect Competition Characteristics (a type of market structure)

Answer 2

• Large number of small firms
• no control over price
• all firms sell homogenous products
• no barrier to entry
• Ex. Agriculture

Question 3

Monopoly Characteristics (A type of market strucutre)

Answer 3

• Single/dominant large firm
• Sig. control over price
• Sell a unique product with no close substitutes
• High barriers to entry
• Ex. Electricity company

Question 4

Monopolistic Competition Characteristics (One of the 4 market strucutres)

Answer 4

• Large number of firms
• substantial control over market price
• Product differentiation
• No barriers to entry
• Fast food industry

Question 5

Oligopoly Characteristics (A type of market structure)

Answer 5

• Small number of large firms
• Have significant control over market price
• Firms are interdependent
• Products may be differentiated or homogenous
• High barriers to entry
• Ex. Car Industry

Question 6

Imperfect Competition

Answer 6

Firms face some degree of competition, but also have some degree of market power

Question 7

Product Differentiation

Answer 7

When firms in an industry tries to make its product different from those of its competitiors

Question 8

Barriers to entry

Answer 8

Anything preventing a firm from entering the industry

Question 9

revenue

Answer 9

The payment that firms receive when they sell their good and services

Question 10

Total Revenue (TR)

Answer 10

the amount of money received by firms when they sell a good. TR = PxQ

Question 11

Average Revenue (AR)

Answer 11

Revenue per unit of output sold. AR = TR/Q

Question 12

Marginal Revenue

Answer 12

The additional revenue arising from the sale of an additional unit of output. MR = Change in TR/Change in Q

Question 13

Average Cost

Answer 13

Costs per unit of output, of the costs of each unit of output on average. AC = TC/Q

Question 14

Economies of Scale

Answer 14

Decreases in the avg costs of production that occur as a firm increases its output by varying all its inputs

Question 15

profit maximisation

Answer 15

making profit as large as possible, and is achieved by MR = MC

Question 16

Abnormal Profit

Answer 16

TR>TC

Question 17

Normal Profit

Answer 17

TR = TC

Question 18

Negative Profit

Answer 18

TR

Question 19

Price Taker

Answer 19

A firm that accepts a price at which it sells its product. Refers to firms in perfect Competition

Question 20

Price Maker

Answer 20

Any firm has the ability to influence the price of its product, arises whenever the firm faces a downward slopping demand curve

Question 21

Natural monopoly

Answer 21

A single firm that can prodduce for the entire market at a lower AC than 2 or more smaller firms.

Question 22

Price Competition

Answer 22

When a firm lowers its price to attract customers away from rival firms

Question 23

Non-Price Competition

Answer 23

When firms compete with each other on the basis of methods other than price

Question 24

Collusive Oligopoly

Answer 24

Refers to the type of oligopoly where firms agree to restrict output or fix the price, in order to limit competition.

Question 25

Cartel

Answer 25

Formal Agreement between firms in an industry to take action to limit competition