Competition

Question 1

What is perfect competition?

Answer 1

Perfect competition is a market structure where many firms offer a homogeneous product.

Question 2

What are features of perfect competition?

Answer 2

Many firms. Freedom of entry and exit; this will require low sunk costs. All firms produce a homogeneous product. All firms are price takers. Asymmetric information

Question 3

What will happen if supernormal profits are made in perfect competition?

Answer 3

If supernormal profits are made new firms will be attracted into the industry causing prices to fall. If firms are making a loss then firms will leave the industry causing price to rise

Question 4

What is monopolistic competition?

Answer 4

Many firms in the market , selling slightly differentiated products. Each firm holds are relatively small market share

Question 5

What are the characteristics of monopolistic competition?

Answer 5

Many firms, many buyers , slightly differentiated product, low barriers to entry/exit, price makers. Objectives are to profit maximise MR=MC