Market Power - Perfect / Monopolistic Competition

Question 1

Market power

Answer 1

Ability of a firm to raise the market price of a good service above its marginal cost by restricting output

Question 2

Four major market forms

Answer 2

Perfect, monopolistic, oligopoly, monopoly/monopolist

Question 3

Perfect competitor characteristics (5)

Answer 3

• Large number of small firms
• No control over the price
• Produce identical products
• No barriers to entry/exits
• Producers and consumers have perfect information of the market (prices, costs, quantity)

Question 4

Perfect competitor in the long run

Answer 4

No barriers to entry/exit so other firms will enter, increasing supply so price decreases so can only make normal profits

Question 5

Perfect competitor in the short run

Answer 5

Can make abnormal or economic losses

Question 6

Productive efficiency

Answer 6

When a firm is producing at a quantity where AC is at its lowest point (MC=AC)

Question 7

Allocative efficiency

Answer 7

When a firm is producing at a quantity that is optimal for consumers and producers ie S=D and AR=MC

Question 8

Productive efficiency with a perfect competitor

Answer 8

In short run, making abnormal profit or economic losses so not producing where AC is minimum so not PE. In long run, makes normal profits so is productively efficient

Question 9

Allocative efficiency with a perfect competitor

Answer 9

PC always produces where MC=AR so it is allocatively efficient

Question 10

Imperfect competition

Answer 10

Where a market does not operate where MSC=MSB (s=d)

Question 11

Types of competitors that are imperfect competitors

Answer 11

Monopolists, monopolistic, olgiopolists

Question 12

Imperfect competition profit maximising level

Answer 12

MR=MC so welfare loss occurs

Question 13

There is market failures with…

Answer 13

Monopolistic competition, oligopoly, monopoly

Question 14

Monopolistic competition characteristics

Answer 14

• Large number of small firms
• No major barriers to entry and exit
• Produce similar but differentiated products
• Small control over price/output because of amount of competition in the market

Question 15

Examples of monopolistic competition

Answer 15

Small dairies, hairdressers, butchers, small clothing stores

Question 16

Monopolistic competitors short run

Answer 16

It can make economic losses at profit max or abnormal profits

Question 17

Monopolistic competitors long run

Answer 17

If a firm is making abnormal profts, as there is no entry barriers, firms join resulting in abnormal profit being eliminated and firm making normal profits.