Market Structure

Question 1

How do you define the structure of a market

Answer 1

1. The competitiveness of the market
2. Number of firms in a market
3. If product is identical/homogenous or differentiated
4. Barriers to entry

Question 2

What are the market structures from least competitive to most competitive

Answer 2

Monopoly
Oligopoly
Monopolistic
Perfect competition

Question 3

What are the main characteristics of a perfectly competitive market

Answer 3

-high degree of competition
-many buyers and seller but none of them are large enough to influence price
-low barriers of entry e.g. freedom of entry and exist
-buyers and seller posses perfect knowledge of price so sellers must price at market price
-all firms must produce a homogenous product

Question 4

How is price determined in a perfectly competitive market

Answer 4

The price is the equilibrium between a downward sloping demand curve and an upward sloping supply curve. In a perfectly competitive market sellers must except market price or choose not to sell

(Physical flash card with the graphs on)

Question 5

Why are profits likely to be lower in a competitive market than a market dominated by large firms

Answer 5

In a perfectly competitive market in the long run there is no barriers so if a market enjoys high profits (abnormal profits) this profit sent a signal to other firms to enter the market. When this new firm enters the market supply increases which leads price to fall and as firms in this market are price takers their price also decreases. Whereas if you only have a few firms in a marker there are high barriers to entry so it’s unlikely that new firms will enter the market.

Question 6

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