Competition

Question 1

What are the four types of market structure.

Answer 1

1. Perfect competition
2. Monopolistic competition
3. Oligopoly
4. Monopoly

Question 2

Describe perfect competition.

Answer 2

Many firms
Freedom of entry to the market
Product is homogenous (undifferentiated).
Firm faces a horizontal demand curve as they a price takers (no control over price)

Question 3

Describe monopolistic competition.

Answer 3

Many or several firms
Freedom of entry to the market
Products are differentiated
Firm faces a downward sloping but elastic demand curve (limited control over price)

Question 4

Describe oligopoly.

Answer 4

A few firms
Restricted entry to the market
Products can be either differentiated or undifferentiated
Firms faces a downward sloping demand curve that is relatively inelastic (control over price depends on rivals).

Question 5

Describe monopoly.

Answer 5

One firm
Restricted or blocked entry to the market
Unique product
Firms faces a downward sloping demand curve that is inelastic. (the firm has considerable control over price).

Question 6

Draw a curve showing the average and marginal costs. Describe why their shape is like that.

Answer 6

• The average cost is U shaped.
• For the first few units of goods, there are higher fixed costs associated hence the higher cost per unit. Eventually, it becomes less efficient to produce more output, so the cost per unit increases again.
• The marginal cost curve is decreasing initially as it becomes cheaper to produce the next good due to the high initial start up costs. Eventually, the marginal returns begin to diminish as it becomes less efficient and more costly to produce more.
• The marginal cost curve always intersects the average cost curve at the lowest point. This is because if the marginal cost < average cost then the average cost will decrease (and the curve will move down). If the marginal cost is > average cost then the average cost will increase (and the curve will move up).