Market Structure and Market Power

Question 1

What does market structure determine?

Answer 1

Market power

Question 2

What is market power?

Answer 2

Market power is the extent to which a seller can charge a higher price without losing many sales to competing
businesses.

Question 3

What are the 4 market structures?

Answer 3

perfect competition.
monopoly.
oligopoly.
monopolistic competition.

Question 4

What are the 3 characteristics in a perfect competition market structure?

Answer 4

all businesses in an
industry sell an identical
good, and there are many sellers and
many buyers, each of
whom is small relative to
the size of the market. Sellers have no market
power.

Question 5

What are the 2 characteristics in a monopoly market?

Answer 5

Monopolistic markets are markets in which
there is only one seller. The seller has a lot of
market power

Question 6

What are the 2 characteristics in an oligopolistic market?

Answer 6

Oligopolistic markets are markets with only
a handful of large sellers. The sellers have
some market power.

Question 7

What are the 3 characteristics in a monopolistically competitive market?

Answer 7

Monopolistically competitive markets are
markets in which many small businesses
compete, each selling
differentiated products.
Product differentiation
The sellers have some
market power.

Question 8

What is imperfect competition?

Answer 8

The situation of facing at least some competitors and/or selling products that
differ at least a little from those of competitors

Question 9

Most businesses do not operate in imperfectly competitive markets. True or False

Answer 9

False

Question 10

What 2 things is there a trade off between?

Answer 10

It is a trade-off between selling a large quantity of items versus making more money on each item

Question 11

What is market demand?

Answer 11

Market demand is the quantity demanded across all firms.

Question 12

What is firm demand?

Answer 12

Firm demand is the quantity demand from your firm.

Question 13

What is individual demand?

Answer 13

Individual demand is the quantity demanded by a single buyer.

Question 14

What do good decisions focus on?

Answer 14

Marginal revenue is the addition to total revenue

you get from selling one more unit

Question 15

What does the marginal revenue reflect?

Answer 15

Marginal revenue reflects the output effect minus

the discount effect.

Question 16

What is the output effect mean + symbol?

Answer 16

The output effect is the revenue increase from

selling one more unit. P

Question 17

What is the discount effect + formula?

Answer 17

The discount effect is the revenue loss from

cutting the price on all the units sold. Discount effect = ΔP×Q

Question 18

How do sellers determine their prices and quantities?

Answer 18

How do sellers determine their prices and quantities?
Keep selling until your marginal revenue equals
your marginal cost. Set your price on the demand curve.

Question 19

What is the problem with market power?

Answer 19

Market power distorts market forces, leading to worse

outcomes. Sellers exploit market power

Question 20

Why do governments regulate markets? (2)

Answer 20

laws that ensure that competition thrives.
laws that minimise the harmful ways that businesses
might exploit their market power.

Question 21

What are 3 laws that enable competition to thrive?

Answer 21

Anti-collision laws: collusion is an agreement to limit collusion
Merger laws
International trade fosters competition

Question 22

What can the government do to limit firms from exercising their market power?

Answer 22

The government can implement price ceilings to limit

market power. Set price = Marginal cost

Question 23

By setting the price to be equal to marginal cost, what 2 things does that eliminate?

Answer 23

Eliminates the discount effect

Eliminates the underproduction problem

Question 24

In perfectly competitive markets, what do price ceilings reduce?

Answer 24

Price ceilings reduce economic surplus

Question 25

In imperfectly competitive markets, what do price ceilings increase?

Answer 25

Price ceilings increase economic surplus

Question 26

What is a natural monopoly? + 2 examples

Answer 26

Natural monopoly: A market in which it is cheapest for single business to service the market.
Examples: water, gas electricity

Question 27

What is the best output for society’s interest?

Answer 27

Price = Marginal cost

Question 28

What are the problems with natural monopolies?

Answer 28

But Price < Average cost
The supplier would lose money.
Suppliers can stay in business only by offering prices that are too high.

Question 29

3 solutions governments can use to solve issues with natural monopolies

Answer 29

The government provides goods.
Set Price = Marginal cost
Tax revenues pay for losses