Contestability

Question 1

What is a contestaboe market (2)

Answer 1

Where companies can enter and leave freely with low sink costs
Hit + run economies

Question 2

What are sunk costs

Answer 2

Costs that cannot be recovered = Salaries + rent + admin costs

Question 3

Profits of a contestaboe market

Answer 3

Abnormal profits can be earned in the short run
Normal profit is earned only in the long run

Question 4

What is incumbent firm

Answer 4

Existing

Question 5

Why profit is way is in contestaboe market (3+)

Answer 5

New firms are attracted by the short run abnormal profit = supply increases + prices down
If a firm is making a loss it will leave the industry because in the long run it cannot operate as a loss making concern
In practice however established firms actually end up making normal profit in the short run = prevent hit and run competition

Question 6

Barriers to enter in constetable market

Answer 6

NONE
Only natural ones and those created by incumbent firms

Question 7

What is limit pricing

Answer 7

Price is lowered so they make normal profits = sales maximisation = AC=AR

Question 8

Why limit pricing

Answer 8

Make the market less attractive and reduce incentive for new firms to enter

Question 9

Contest ability and monopolies (2+)

Answer 9

Governments = increase the contestability of markets = method of influencing the behaviour of monopolies.
Influences monopolies and oligopolies to self-regulate their own behaviour = prices low and quality high in order to discourage potential competitors

Question 10

Barriers to entry are high in monopoly + why int he future May new firms be able to enter (2)

Answer 10

Markets are dynamic so BoE can be lost
Dynamic efficiency of rivals, scandals, changing trends, government intervention etc anything which disrupts the current market situation = opportunity