Competitive markets and monopolies

Question 1

What are the four assumptions for modelling perfect competition?

Answer 1

• large number of producers
• identical products
• freedom of entry and exit
• readily available information

Question 2

Key points about producers in perfect competition?

Answer 2

• large number
• each firm is small in sixe
• all producers are price takers
• each firm can sell call its output at the current price
• demand curve is perfectly elastic

Question 3

Explain the assumption of identical products in perfect competition?

Answer 3

• all items are homogenous
• buyers cannot tell the differance
• no branding or brand loyalty
• firms are unable to raise prices

Question 4

Explain the assumption of freedom of entry and exit in perfect competition?

Answer 4

• no barriers to entry or exit

- firms free to enter or leave as they wish

Question 5

Give examples of barriers to entry?

Answer 5

• running costs
• research and development
• start up costs

Question 6

Explain the assumption of readily available information in perfect competition?

Answer 6

• there is perfect knowledge ( when both buyers and sellers have a detailed understanding of all factors in market)

Question 7

What is a pure monopoly?

Answer 7

only one firm in the industry

Question 8

What is a dominant monopoly?

Answer 8

• monopoly with 40% or more market share

Question 9

Give key concepts of a monopolist?

Answer 9

• only firm in industry
• demand curve and market curve are the same
• aims to profit maximise
• a price maker

Question 10

What is market power?

Answer 10

the ability of a firm to set price above marginal cost

Question 11

What will happen becuase of a monopolist>

Answer 11

allocative inefficiency and a misallocation of resources

Question 12

What is a monopoly an example of?

Answer 12

market failure

Question 13

What are sources of monopoly power?

Answer 13

factors that allow a firm to control price and output in a marker

Question 14

What do sources of monopoly power do?

Answer 14

portect the firm in the industry and lead to differant behaviour by firms under conditions of monopoly and oligopoly than under that of perfect competition

Question 15

What is the price elasticity of demand for a monopolist?

Answer 15

inelastic (allows them to set higher prices )

Question 16

Examples of barriers to entry in any market?

Answer 16

• high costs to enter market
• economies of scale experienced by large firms
• interlectual property rights or patents
• government regulation restricting firms from entering the market

Question 17

What does the degree of concentration in a market refer to?

Answer 17

number of firms that dominate the market

Question 18

Where is the highest concentration ratio ?

Answer 18

monopoly

Question 19

Where is a low concentration ratio?

Answer 19

perfect compettion

Question 20

What is product differentiation?

Answer 20

when firms try to make their product differant to the competition by adapting the actual product in some way

Question 21

What are some advantages of being a monopoly?

Answer 21

• economies of scale
• large research and development
• have dynamic efficiency (lower LRAS from better innovation)
• better quality products

Question 22

What is a natural monopoly?

Answer 22

occur when nature of industry means there would be high productive inefficiency if more than one firm supplied the product

Question 23

Disadvantaged of a monopoly?

Answer 23

• removes competition
• makes supernormal profits in the long run, consumer is exploited
• is productively inefficient
• is allocatively inefficient
• can reduce choice and qualityt