Market structure: perfect competition and monopoly

Question 1

When does productive efficiency occur?

Answer 1

When firms produce at minimum long-run average cost by:
* choosing appropriate combinations of factors of production, and
* producing maximum possible output from those inputs

Question 2

What three questions should a firm consider when trying to get to productive efficiency?

Answer 2

1. How much output do we want to produce?
2. Given that required output, what combination of factors should we choose?
3. How do we produce that output using those factors at the minimum cost?

Question 3

What is X-inefficiency?

Answer 3

when a firm is not operating at minimum cost

Question 4

When is allocative inefficiency achieved?

Answer 4

when society is producing the appropriate bundle of goods and services relative to consume preferences

Question 5

When there is X-inefficiency is the long-run average cost curve above or below the most efficient long-run average cost curve?

Answer 5

above

Question 6

In an individual market, what should price be equal to when there is allocative efficiency?

Answer 6

marginal cost

Question 7

How does dynamic efficiency differ from static efficiency?

Answer 7

dynamic efficiency takes into account effect of innovation and technical progress on productive and allocative efficiency in the long run; static efficiency does not

Question 8

How do static and dynamic efficiency interact?

Answer 8

To achieve dynamic efficiency, you may need to sacrifice static efficiency by investing in eg research and development.

Question 9

When there is perfect competition, can an individual firm influence price?

Answer 9

no

Question 10

Give an example of a market with perfect competition.

Answer 10

cauliflowers or carrots

Question 11

When there is perfect competition, can firms easily enter and exit the market?

Answer 11

yes

Question 12

How many firms are in the market in a monopoly?

Answer 12

one

Question 13

Give an example of a near-monopoly.

Answer 13

Google

Question 14

Describe monopolistic competition.

Answer 14

Many firms in the market with similar but not identical products

Question 15

Give an example of monopolistic competition.

Answer 15

small local Indian restaurants

Question 16

What are the characteristics of an oligopoly?

Answer 16

• a few firms
• some barriers to entry
• some influence on price

Question 17

Define barrier to entry.

Answer 17

a characteristic of the market that prevents new firms from readily joining it

Question 18

Define perfect competition.

Answer 18

a market structure that produces allocative and productive efficiency in long-run equilibrium

Question 19

Give the six assumptions of perfect competition.

Answer 19

1. Firms aim to maximise profits.
2. Many buyers and sellers, none of whom is large enough to influence price
3. Homogeneous product
4. No barriers to entry or exit from the market
5. Perfect knowledge of market conditions
6. No externalities

Question 20

Define price taker.

Answer 20

firm that must accept the price set in the whole market

Question 21

What shape is the demand curve if there is perfect competition?

Answer 21

flat, ie demand is perfectly elastic

Question 22

If there is perfect competition, how do average and marginal revenue compare?

Answer 22

average revenue = marginal revenue = price

Question 23

Has the internet made perfect competition more or less likely than pre-internet?

Answer 23

More, as more information available to buyers, eg price comparison websites

Question 24

Is productive efficiency achieved under perfect competition?

Answer 24

Yes in the long run, as long-run equilibrium is at minimum point on long-run average cost curve

Question 25

Is productive efficiency achieved under monopoly?

Answer 25

No, long-run equilibrium will only be at minimum point on long-run average cost curve by coincidence; little incentive to be productively efficient when there are barriers to entry

Question 26

Is allocative efficiency achieved under perfect competition?

Answer 26

yes, in short and long run, as price = marginal cost

Question 27

Is dynamic efficiency achieved under monopoly?

Answer 27

It can be, as monopoly firms makes supernormal profits so could use them for research and development

Question 28

Is allocative efficiency achieved under monopoly?

Answer 28

no, as price > marginal cost

Question 29

Is dynamic efficiency achieved under perfect competition?

Answer 29

No, as firms make normal profits with no surplus available for investment or innovation

Question 30

What three conditions hold in a monopoly?

Answer 30

1. single seller of the good
2. no actual or potential substitutes for the good
3. barriers to market entry

Question 31

Is a monopoly firm a price taker or price maker?

Answer 31

price maker

Question 32

What happens to a monopoly’s profits if demand increases?

Answer 32

Profits increase as sell more and sell at higher price

Question 33

Give four reasons that a monopoly might arise.

Answer 33

1. government creates a monopoly
2. product is patented
3. natural monopoly, eg due to economies of scale
4. establishment of widely accepted standard / new product then effective marketing

Question 34

How will price compare under monopoly and perfect competition?

Answer 34

monopoly price higher

Question 35

How will output compare under monopoly and perfect competition?

Answer 35

monopoly output lower

Question 36

Define third-degree price discrimination.

Answer 36

when a firm is able to charge groups of consumers a different price for the same product

Question 37

What four conditions are needed for third-degree price discrimination?

Answer 37

1. Firm must have market power.
2. Firm must have information about consumers’ willingness to pay.
3. Must be identifiable differences between consumers.
4. Consumers must have limited ability to resell (so arbitrage not possible).

Question 38

What is arbitrage?

Answer 38

process by which prices in two market segments are equalised by the purchase and resale of products