Chapter 23- Market Structure

Question 1

Market Structure

Answer 1

the conditions which exist in a market including a number of firms

Question 2

Competitive Market

Answer 2

a market with a number of firms that compete with each other

Question 3

Competitive Markets

Answer 3

the more competitive a market is, the more buyers and sellers there are. Wit a large number of firms, the amount of market share each firm has will be reduced therefore accounting for a small amount of total market supply. The change of output of a single firm will have little to no effect on price as consumers can switch between products of rival firms. There is usually relatively free entry and exit in these markets.

Question 4

Behavior of Competitive Firms

Answer 4

Firms aim to keep their prices low as an increased price runs the risk of losing its sales to rivals as they are likely to be selling close substitutes. They may aim to improve their products to receive a competitive advantage and they are likely to respond to all changes in demand. easy entry and exit in the markets keeps profits relatively low in the long run and in some cases, firms end up producing normal profit. If the demand for a product rises, supernormal profit may be earned which attracts new firms to the market. The increase in supply would lead to surplus that reduces the price and returns the profit to normal level. If demand for a product falls, firms will make loss and leave the industry which will reduce supply and increase price causing normal profits to be restored.

Question 5

Performance of Competitive Firms

Answer 5

high level of competition provides firms with incentive and threat to produce according to consumers’ wants at the lowest possible cost.

Firms that can cut costs and respond more quickly to consumer demand gain competitive advantage and earn higher profit. If a firm is inefficient or doesn’t respond to change in consumer demand they will be driven out of the market.

high competition may drive the price down to a level where it just covers the cost, but this price may not be very low as competitive firms are most likely to be small and have higher unit costs.

Question 6

Normal Profit

Answer 6

the minimum level of profit required to keep a firm in the industry in the long run

Question 7

Supernormal Profit

Answer 7

profit above that needed to keep a firm in the market in the long run

Question 8

monopoly

Answer 8

A pure monopoly is when there is a sole supplier of a product having 100% share of the market.

Governments also define monopolies as a firm that has 25% market share or a dominant monopoly when a firm has 40% share of the market

They have high barriers of entry and exit

It is a price maker as it supplies the entire industry and hence a change in its supply would change the price

Question 9

Barrier to entry

Answer 9

anything that makes is difficult for a firm to start producing the product

Question 10

Barrier to exit

Answer 10

anything that makes it difficult for a firm to stop making the product

Question 11

why monopolies arise

Answer 11

They may develop over time. This is where one firm may have been so successful in cutting costs and responding to changes in consumer demand in the past that it was able to drive out all rival firms and take control of the whole market. This could also have been achieved through mergers and takeovers that resulted in the number of firms in the market to be reduced to 1.

They may also exist from the start where a single firm may own all the gold mines in a given county or a may have been granted monopolistic powers by government(this would make it illegal for other firms to enter the market). The patenting of a product might have the same effect.

Question 12

Why Monopolies Continue

Answer 12

Barriers of Entry and Exit:

Legal Barriers- patents or government

Scale of Production- large scale of production allows for lower unit cost. New firm would have a lower scale of production and higher unit cost as they don’t have the money required to buy large amounts of capital equipment to produce at large scale.

Brand Loyalty- creation of brand loyalty through advertisement and branding and monopolies access to resources and retail outlets make it hard for other firms to enter the market

Long-term contracts- some firms are reluctant to undertake such a commitment

Sunk Costs

Question 13

Scale of Production

Answer 13

the size of production units and methods of production used

Question 14

Sunk Costs

Answer 14

costs that cannot be recovered if a frim leaves the industry. Eg: advertising and industry specific equipment

Question 15

Behavior of Monopoly

Answer 15

monopolies can earn supernormal profits in the long run. They have control over the supply of a product and may seek to influence the demand but don’t have control over it. They can either set the price and accept the level of sales that consumers are prepared to at the price. Or they can choose to sell a given quantity and allow the price to be determined by what consumers are willing to pay for the given quantity.

Question 16

The performance of a Monopoly

Answer 16

They may cause concerns that the absence of competition may lead to inefficiency. They may restrict the supply to push up prices and produce a lower quality product as they know consumers don’t have rival products to switch to. They may also fail to respond to changes in consumer taste and develop new products.

Monopolies can be relatively efficient as they produce on a large scale which reduces their unit cost. They are more efficient than competitive markets in cases where the wasteful production of duplicate capital equipment doesn’t occur. For eg. it would be expensive and unsafe to have multiple firms laying and operating train tracks. High profits of a monopoly would enable it to spend more on the research and development of new and better products which would allow them to earn more profit. Furthermore the existence of barriers of entry would encourage firms that seek to enter the market to develop better products.

Question 17

Occurrence of Monopoly

Answer 17

The narrower the definition of a monopoly in terms of product and geographical area, the more examples will be found. Eg. a country might have just one firm supplying gas but many in the energy industry. There might be many food shops in town but only one on an estate, making it a local monopoly.