Chapter 12: Perfect Competition

Question 1

Markets (sellers) can be part of one of four types of market structure?

Answer 1

1. Perfect Competition
2. Monopolistic Competition
3. oligopoly
4. Monopoly

Question 2

What is a pure monopoly? (4)

Answer 2

• one firm
• unique product, no close substitutes
• firm has considerable control over price
• other firms cannot enter industry

Question 3

Why can’t other firms enter the industry in a monopoly? (2)

Answer 3

• due to regulation or due to high start-up costs
• in a natural monopoly, there is no room in the market

Question 4

Give 2 examples of pure monopolies

Answer 4

local utilities and subway systems

Question 5

What is an oligopoly? (4)

Answer 5

• a few firms
• price control is minimal if no collusion
• difficult for other firms to enter industry
• a lot of advertising

Question 6

What are some examples of oligopolies?

Answer 6

• automobiles, banking, airlines
  so like firms are big and few enough so that each of them matters

Question 7

What is monopolistic competition? (5)

Answer 7

• many firms
• differentiated products
• some control over price, but limited
• easy for other firms to enter the industry
• heavy advertising, brand names
  retail trade, pop, coffee shop

Question 8

What is pure competition? (4)

Answer 8

1. lots of firms, but each firm is a very small player so too small to have any effect at all
2. Indistinguishable product to consumers, so as long as the price is the same, consumers are indifferent
3. Easy entry, no legal, technological, financial obstacles to prevent entry or exit
4. Perfect information so buyers and sellers know the market price and quality of standardized products

Question 9

in pure competition, what is price set by? (2)

Answer 9

• supply and demand curves
• an individual firm is a “price taker” as it cannot change market price and can only adjust to it

Question 10

Does pure competition need advertising?

Answer 10

no
ex. agriculture, stock market
u should study pure competition cuz its a benchmark

Question 11

What is the demand slope for perfect competition industries?

Answer 11

typically downward sloping

Question 12

What is the demand curve for perfect competition firms?

Answer 12

horizontal and perfectly inelastic

Question 13

What is production in the short run for PC firms?

Answer 13

• cannot change price
• only two decisions: how much to produce or should I even produce at all?
• in other words, the PC firm only chooses quantity that will MAXIMIZE profit

Question 14

How do firms determine profit maximization?

Answer 14

• we now have cost curves, with these, firms can determine the optimal level of output to maximize profit

Question 15

Profit formula

Answer 15

profit = revenue - costs

Question 16

Profit maximization graph

Answer 16

Question 17

How do we determine graphically when profit is maximized?

Answer 17

• level of Q for which Marginal Revenue = Marginal cost
  RULE NUMBER 1!!! MR = MC

Question 18

What is total revenue?

Answer 18

• the amount of money the firm receives from selling tis product

Question 19

Total revenue formula

Answer 19

TR = P*Q

Question 20

Average revenue formula

Answer 20

Total revenue/quantity

Question 21

What is marginal revenue?

Answer 21

• the amount of revenue received from selling one more unit of the product

Question 22

marginal revenue formula

Answer 22

change in TR/change in Q

Question 23

For a perfectly competitive firm, what is the formula for TR, AR, MR?

Answer 23

see graphs PLEASE

Question 24

Profit graph

Answer 24

remember that decisions are automatic