Market Structures

Question 1

Define homogenous goods

Answer 1

Goods that are exactly the same and make perfect substitutes

Question 2

What is a price taking firm

Answer 2

A company that must accept prevailing prices in a market, lacking the market share to influence market price on its own

Question 3

What is perfect elasticity

Answer 3

If demand is perfectly elastic, it means that at a certain price demand is infinite ( a good with a very high elasticity of demand)

Question 4

What is profit maximisation

Answer 4

Where marginal revenue = marginal cost (MC = MR)

Question 5

Define entry and exit to market

Answer 5

Requirements to enter and exit the market

Question 6

What are the characteristics of perfectly competitive market

Answer 6

Homogenous products (all perfect substitutes)

Large number of buyers and sellers -> no one firm has influence over the market

No cost for entry and exit

Perfect information of buyers and sellers

Perfectly elastic demand curve

All firms have access to factors of production

Question 7

Illustrate a price taking firm making supernormal profit in the short run

Answer 7

Diagram on page 7 of market structures booklet

Question 8

Illustrate a price taking firm adjustment to long run equilibrium

Answer 8

Diagram on page 8 of market structure booklet

Question 9

What would be the shut down price for a competitive firm in the short run

Answer 9

P = Min AVC

Question 10

Illustrate the shut down position for a firm in a perfectly competitive market

Answer 10

Perfect competition in the short run - Tutor2u

Question 11

Define the shut down price

Answer 11

The minimum price a business needs to justify remaining in the market in the short run

A business needs to make at least normal profit in the long run to justify remaining in an industry but in the short run a firm will continue to produce as long as total revenue covers total variable costs (short run shutdown price)

Question 12

Define imperfect competition

Answer 12

A market where one of the conditions in a perfectly competitive market is not met

Question 13

Define monopolistic markets

Answer 13

A monopolistic market is a theoretical condition that describes a market where only one company may offer products and services to the public. A monopolistic market is the opposite of a perfectly competitive market, in which an infinite number of firms operate.

In a purely monopolistic model, the monopoly firm can restrict output, raise prices, and enjoy supernormal profits in the long run.

Question 14

Define differentiated products

Answer 14

A process of distinguishing a product or service from others, to make it more attractive to a particular target market

Question 15

Define price making firms

Answer 15

A firm that has some market power to control the price it sells at

Question 16

Define non-price competition

Answer 16

Involves ways that firms seek to increase sales and attract customers through methods other than price

Question 17

What are the characteristics of a monopolistically competitive market

Answer 17

Differentiated products

Price making firms

Non price competition

Low barriers to entry + exit

Many buyers + sellers

Question 18

Define allocative efficency

Answer 18

Markets allocate resources efficiently, welfare is equally distributed in the market

Question 19

Illustrate a price making monopolistic competition diagram making supernormal profit in the short run

Answer 19

Diagram on page 19 of market structure

Question 20

Illustrate a price making monopolistic competition diagram making normal profit in the long run

Answer 20

Page 20 of market structure

Question 21

Define allocative efficiency

Answer 21

When there is an optimal distribution of goods and services, taking into account consumer preferences

(The equilibrium)

Question 22

Illustrate allocative efficiency on a diagram

Answer 22

Check page 22 on market structure

Question 23

What is hit and run competition

Answer 23

When a firm temporarily enters a market and then leaves when supernormal profits are exhausted

Question 24

What is a contestable market

Answer 24

A market where companies can enter and leave freely with low sunk costs (low barriers to entry + exit)

Question 25

Define oligopoly

Answer 25

A market with a small number of firms (e.g. coffee shops, supermarkets)

Question 26

Define concentration ratio

Answer 26

The proportional % of a market usually held by the top 3-4 firms (e.g. Tesco, Morrisons, Asda) where one firms decisions effect other firms

Question 27

Define duopoly

Answer 27

Where there is only 2 firms in the market

Question 28

Define price rigidity/sticky prices

Answer 28

Where the price of a good does not change immediately or readily to the new market-clearing price when there are shifts in the demand and supply curve

Question 29

What are the characteristics of an oligopoly

Answer 29

High barriers to entry
Few firms
Non price competition
Interdependent

Question 30

Illustrate and explain the kinked demand curve

Answer 30

Page 35 of market structures

Question 31

Define collusion

Answer 31

When two or more parties act together to influence production/and or price levels for their mutual benefit

Question 32

Define price fixing

Answer 32

An agreement among competitors to raise, lower, maintain or stabilise prices or price levels

Question 33

Define output quota

Answer 33

A quota is a government imposed trade restriction that limits the number or monetary value of goods that a country can import or export during a particular period

Question 34

What are the main aims of business collusion

Answer 34

-increase in level of profit the firms can make for all firms as they are mutually interdependent and act together

-collusion lowers the cost of competition e.g. wasteful marketing wars which can run into millions of pounds

-collusion reduces uncertainty in a market and higher profits increases producer surplus/shareholder value - leading to higher share prices

Question 35

Illustrate a diagram for a collusive oligopoly

Answer 35

Page 52 market structure

Question 36

Illustrate a diagram for an oligopoly

Answer 36

Check internet