Chapter 7

Question 1

What is the affect of competition in markets?

Answer 1

Competition in markets often occurs ion the basis of price, quality, location, service and advertising.

Question 2

What are the characteristics of pure competition?

Answer 2

• Number of sellers- Very large number of independently acting sellers offering their products in large national or international markets
• Standardised product- They produce identical products and perfect substitutes, if the prices are the same consumers will be indifferent about which seller to buy form
• Price takers- No significant control over product price this is as there is a small fraction of the market produced by each firm. The competitive firm cannot change the market price and the demand curve is perfectly elastic
• Free entry and exit - New firms can freely enter and existing firms can freely leave purely competitive industries. As their is no significant legal, technological, financial or other obstacles.

Question 3

What is pure competition?

Answer 3

In pure competition involves a very large number of firms, standardised product, very easy entry and exit from industry

Question 4

What is the curve of pure competition?

Answer 4

In pure competition firms have a perfectly elastic demand curve which is the same as the average revenue curve and marginal revenue curve and this is all the same as the price (P=AR=MR).

Question 5

What is the market demand graph?

Answer 5

Market demand graphs are down sloping curves and an entire industry can still affect price by changing the total output.

Question 6

What is average revenue in a pure competition?

Answer 6

Pure competition, firm’s demand curve is horizontal and is also its AR curve. The price per unit to the purchaser is also its revenue per unit. AR = TR/Q = P*Q/Q = P that is constant for the firm (price taker)

Question 7

What is the total revenue in a pure competition?

Answer 7

Pure competition, total revenue is a straight line that slopes upward to the right and is found by multiplying price by the corresponding quantity, TR = P*Q.

Question 8

What is the marginal revenue in a pure competition?

Answer 8

Pure competition, marginal revenue coincides with the demand curve because the product price is constant and their is a change in revenue from selling 1 more unit of output. MR = ΔTR/ΔQ = Δ(PQ)/ΔQ = PΔQ/ΔQ = P that is constant for the firm.

Question 9

What are the two approaches in profit maximisation?

Answer 9

Profit maximisation in the short run has two main approaches Total Revenue (TR) - Total Cost (TC) and Marginal revenue (MR) - Marginal cost (MC).

Question 10

How will a purely competitive firm maximise economic profit?

Answer 10

The purely competitive firm is a price taker and it can maximise its economic profit only by adjusting its output. It can adjust its output only through changes in the amount of variable resources.

Question 11

What are the different forms of profit maximization seen?

Answer 11

• TR>TC = Supernormal profit;
• TR=TC = Normal Profit.
• TR>TC = loss

Question 12

How do you calculate total revenue?

Answer 12

TR= P x Q

Question 13

How do you calculate total cost?

Answer 13

TC= Price at ATC x Q

Question 14

What is shown on a total revenue- total cost approach?

Answer 14

On a Total Revenue (TR) - Total Cost (TC) the total-revenue curve for a purely competitive firm is a straight line. Total cost increases with output in that more production requires more resources. The rate increase varies with the relative efficiency of the firm.

Question 15

What is shown on a Marginal Revenue- Marginal cost approach?

Answer 15

On a Marginal Revenue- Marginal cost curve. Total revenue is found when MR= MC at equilibrium and then finding your output and your price on the demand curve TR= P x Q. Total cost is found where the output equilibrium meets the ATC curve then TC= Price at ATC x Q

Question 16

What will cause a shutdown in a pure competition?

Answer 16

When a business is making a loss in a pure competition firm as long as price is greater than the variable cost then you should remain in business but if its below the firm should shutdown

Question 17

When should a firm produce any level of output?

Answer 17

The firm should produce any unit of output whose marginal revenue exceeds its marginal cost because the firm would gain more in revenue from selling that unit than it would add to its costs by producing it.

Question 18

How does the price marginal cost relationship improve?

Answer 18

The price-marginal cost relationship improves with increased production. The profit-seeking producer should always compare marginal revenue with the rising portion of the marginal-cost schedule or curve.

Question 19

What is loss minimizing?

Answer 19

Wherever price P exceeds average variable cost AVC but is less than ATC, the firm can pay part but not all of it is fixed costs by producing, this is the loss minimizing case.

Question 20

What will the firms produce in the short run?

Answer 20

In the short run, the firm will maximise profit or minimise loss by producing the output at which marginal revenue equals marginal cost.

Question 21

How does quantity supplied increase?

Answer 21

Quantity supplied increases as price increases.

Question 22

When would quantity supplied be zero?

Answer 22

That quantity supplied would be zero at any price below the minimum average variable cost (AVC) and that portion below the MC curve lying above its AVC curve is its short-run supply curve

Question 23

What is pure monopoly?

Answer 23

Pure monopoly is a market structure in which there is a sole seller of a product or service with no close substitutes, entry and exit is completely blocked so one firm constitutes the entire industry.

Question 24

What are the characteristics of monopoly?

Answer 24

• Single seller- Single firm is the sole producer or supplier of the product, the industry and firm are synonymous
• Unique product- No close substitutes and the consumer who chooses not to buy the monopolised product must do without it.
• Price maker- The monopolist controls the total quantity supplied and has considerable control over price. The monopolist faces the usual downward-sloping product demand curve.
• Blocked entry- No immediate competitors. However there are economic, technological, legal or other types of barriers.
• Non-price competition- When standardised products, monopolists engage mainly in public relations advertising. When standardised product, sometimes they also advertise their product’s attributes

Question 25

What are the three assumptions of a monopoly demand curve?

Answer 25

• Patents, economies of scale or resources ownership secure our monopolists status
• No unit of government regulates the firm
• The firms is a single-price monopolists, it charges the same price for all units of output

Question 26

What does the monopolist downward sloping curve mean?

Answer 26

The monopolist’s downward-sloping demand curve means that it can increase sales only by charging a lower price. Each additional unit of output sold increases total revenue by an amount equal to its own price less the sum of the price cuts that apply to all prior units of output

Question 27

How is marginal revenue and total revenue related?

Answer 27

In a monopoly marginal revenue is always below the demand curve. Marginal revenue is positive while total revenue is increasing. When total revenue reaches its maximum, marginal revenue is zero. Total revenue is diminishing, marginal revenue is negative.

Question 28

What a does it mean if firms have a downward sloping demand curve?

Answer 28

Firms with downward-sloping demand curves are price makers, they also indirectly determining the price it will charge

Question 29

How is total revenue and total cost calculated on a pure monopoly curve?

Answer 29

On a pure monopoly cure curve equilibrium is found where MC=MR. This shows the output and the price which is always found on the demand curve to calculate revenue. Price to calculate total cost is found by looking at the output and going to the ATC curve

Question 30

How will a purely competitive seller maximise profit?

Answer 30

The purely competitive seller will maximise profit by supplying the quantity at which MC is equal to that price

Question 31

What is the difference between pure competition and monopoly?

Answer 31

The difference between pure competition and monopoly is in pure competition it’s easier to enter the market while in monopoly it’s harder to enter meaning they can continue to make supernormal profit in the long run

Question 32

What is monopolistic competition?

Answer 32

Monopolistic competition is characterised by a large number of sellers differentiated product non-price competition, entry and exit is quite easy

Question 33

What are monopolistic competition characteristics?

Answer 33

• Relatively large number of sellers- Not as many as in competition as there is a small market share which has limited control over the market.
• No collusion- The presence of a relatively large number of firms ensures that collusion by a group of firms to restrict output and set prices is unlikely
• Independent action- No interdependence among firms. A small firm might experience a small increase in sales by decreasing its price but the effect of that on its competitors is almost unnoticeable
• Differentiated of a particular product - Product attributes have differences with different services, locations and brand names and packaging.
• Limited control over price- despite the relatively large number of firms, monopolistic competitors have some control over their product prices because of product differentiation. Control over price is quite limited since there are numerous potential substitutes for its product.
• Easy entry to and exit from the industry- Competitors are typically small firms, therefore economies of scale are few and capital requirements are low. Small financial barriers may result from developing and advertising a differentiated product
• Advertising- Often heavy advertising to promote differentiated products as non-price competition make price less of a factor in consumers’ decisions and make product differences a greater factor

Question 34

What is the monopolistic curve trend?

Answer 34

In a monopolistic curve it is similar to a monopoly curve but the demand curve is falter as it is elastic. This is due to the perfect substitutes that are available.

Question 35

How do you find the total revenue and total cost on the monopolistic curve?

Answer 35

On a monopolistic curve equilibrium is found where MC=MR. This shows the output and the price which is always found on the demand curve to calculate revenue. Price to calculate total cost is found by looking at the output and going to the ATC curve

Question 36

What is the difference between monopoly and monopolistic competition?

Answer 36

The difference between monopoly and monopolistic competition, monopoly demand curves are more inelastic and falter.