competitive markets

Question 1

market structure

Answer 1

• all the features of a market that affect the behaviour and performance of firms in that market
• ex. number of sellers, size of sellers, extent of knowledge about one another’s actions, degree of free of entry, degree of product differentiation

Question 2

when does a firm have market power?

Answer 2

when they can influence the price of their product

Question 3

pure competition market characteristics

Answer 3

• large number of firms
• standardized product type
• no control over price
• easy to enter the market (no obstacles)
• no nonprice competition
• ex. agriculture

Question 4

monopolistic competition market characteristics

Answer 4

• many firms
• differentiated type of product
• some control over price, with narrow limits
• relatively easy to enter
• emphasis on advertising, branding, trademarks
• ex. retail

Question 5

oligopoly market characteristics

Answer 5

• few firms
• standardized or differentiated product
• control over price limited by mutual inter-dependence, considerable with collusion
• hard to enter (lots of obstacles)
• typically a great deal of nonprice competition, particularly with product differentiation
• ex. steel and auto

Question 6

monopoly market

Answer 6

• one firm
• unique w no close substitutes
• considerable control over price
• blocked entry
• mostly public relations advertising
• ex. local utilities

Question 7

perfect competition theory

Answer 7

a competitive market has:

• a lot of sellers
• standardized product
• easy entry/exit
• “price takers” (when the firm produces as much or little as they want at the given price) - competitive firms can increase their output without affecting the market price

Question 8

demand for perfectly competitive firm

Answer 8

• each firm in a perfectly competitive market faces a horizontal demand curve
• the industry demand curve slopes downwards

Question 9

revenue in a competitive market

Answer 9

• also a horizontal line
• only one price; can’t earn more or less
• where the marginal cost curve intersects with the marginal revenue curve is what the price is
• price takers can only change the quantity output to be at the optimal point (maximizing profits in the short run)

Question 10

if a firm is losing money, should they shut down?

Answer 10

• not always - if they can produce at some output that exceeds variable cost, they should keep going
• if they don’t, they’ll have operating losses that’ll be equal to its fixed costs (“sunk costs”)
• if revenue < variable cost, the firm will lose more by continuing to produce

Question 11

Short run equilibrium in a competitive market

Answer 11

• quantity demand equals quantity supplied, and each firm is maximizing its profits given the market price
• in short-run equilibrium, a competitive firm may be losing, breaking even, or profitting

Question 12

long-run decisions

Answer 12

• if existing firms earn positive economic profit, new firms enter (shifting short run market supply right) and p falls, reducing profits and slowing entry
• if existing firms incur losses, some firms exit (short run market supply shifts left), and p increases, reducing remaining firm’s losses

Question 13

when does zero economic profit occur in long run equilibrium?

Answer 13

when p = atc

• MC intersects ATC at ATC’s minimum (p)
• also called the break even price