Chapter 9: Competitive Markets

Question 1

Market structure, 4 examples

Answer 1

All features of a market that affect the behaviour and performance of firms in the market

• Number/size of sellers
• Extent of knowledge about other firm’s actions
• Degree of freedom of entry
• Degree of product differentiation

Question 2

Market power

Answer 2

The ability of a firm to influence the price of its product

Question 3

Perfect competition

Answer 3

A market structure in which all firms are price takers, and in which there is freedom of entry and exit from the market

Question 4

Homogenous product

Answer 4

Every unit of a product is practically identical to every other unit

Question 5

Price taker

Answer 5

A firm that can alter its output and sales without affecting the market price of its product

Question 6

Total revenue (TR), definition and formula

Answer 6

• Total receipts from the sale of a product

- TR = P x Q

Question 7

Average revenue (AR), definition and formula

Answer 7

• The market price when all units are sold at the same price

- AR = TR/Q = (PxQ) / Q

Question 8

Marginal revenue (MR), definition and formula

Answer 8

• The change in a firm’s total revenue resulting from a change in its sales by one unit
• MR = ∆TR/∆Q

Question 9

Shut-down price

Answer 9

The minimum of a firm’s average variable costs. At prices below this, a profit-maximising firm will shut down and produce no output

Question 10

A profit-maximising firm should produce the output at which ____ ____ equals ____ ____

Answer 10

• Marginal revenue

- Marginal cost

Question 11

Short-run equilibrium

Answer 11

The price and output at which industry demand equals short-run industry supply, and all firms are maximising their profits

Question 12

When an industry is in short-run equilibrium, ____ ____ equals ____ ____, and each firm is maximising its profits

Answer 12

• Quantity demanded

- Quantity supplied

Question 13

What do profits in a competitive industry lead to? (3 marks)

Answer 13

• Entry of new firms
• Industry expansion
• Price falls until economic profits reach zero

Question 14

What will losses in a competitive industry lead to? (3 marks)

Answer 14

• Exit of firms
• Industry contraction
• Market price is driven up until firms are just covering total costs

Question 15

The long-run equilibrium of a competitive industry occurs when firms are earning ____ ____

Answer 15

Zero profits

Question 16

For a competitive firm to be maximising its long-run profits, it must be producing at the ____ point on its LRAC cost curce

Answer 16

Minimum