Market Structure

Question 1

Most important aspect of market

Answer 1

Extent to which competition exists

Question 2

4 assumptions as to market structure

Answer 2

1) Perfect Competition
2) Perfect Monopoly
3) Monopolistic Competition
4) Oligopoly

Question 3

Short-run perfect competition, when will firm maximize profit?

Answer 3

When TR exceeds TC by greatest amount; marginal revenue is = to marginal cost.

Amount received (revenue) from last unit sold equals the incremental (marginal) cost of producing that unit. Marginal revenue = market price

Units after MC=MR would cost more to produce than what they can sell for

Question 4

Long-run perfect competition

Answer 4

In a perfectly competitive market there are no long-run economic profits. MR, MC = LAC. Demand, price, and marginal revenue are the same

Question 5

Perfect monopoly - natural monopoly?

Answer 5

A natural monopoly results from a condition where there are increasing returns to scale, such that a single firm can produce at a lower cost than 2 or more firms

Question 6

Monopolistic firm demand curve

Answer 6

Neg slope; in order to sell more of its commodity, it must reduce its selling prices.

MR steeper slope than demand; MR must be below demand curve,; unit from each additional unit must be less than previous unit.

Produce where MR = MC.

When MC > MR you lose money

Question 7

Monopolistic competition characteristics

Answer 7

Large number of sellers

Firms sell differentiated products that are similar but not identical - close substitute
Market entry and exit easy

Like perfect monopoly downward demand curve and more downward MR. MR is below demand curve because in order to be sloping down each additional unit must be decreasing. Lower MR is pulling down demand curve.

Long-run firms enter the market and thus less demand. If firms have losses they leave the market and thus more demand. Will reach equilibrium to break-even; no LR excess profits

Question 8

Oligopoly characteristics

Answer 8

Few sellers, homogenous or differentiated products, market entry restricted;

Few sellers = interdependence

Demand curve as a kink @ market price. Above market price = more elastic, Less = less elastic

Assumption no player will raise its price

Results in a vertical MR portion @ kink.

In long-run if making profits, they can continue making profits since entry is restricted.

Prices tend not to change to avoid price war; firms tend to compete one actors other than price like advertising.

May collude(illegal); acid collusion not illegal where market leader sets price