Market Structures

Question 1

What are the 4 types of market structure

Answer 1

Oligopoly, Monopoly, Perfect Competition, Monposony

Question 2

What are the 3 key market characteristics and how do they change for competitive vs non competitive markets?

Answer 2

Question 3

Place the 4 market structures on a spectrum from most competitive to least competitive.

Answer 3

Question 4

What are the characteristics of a perfectly competitive market?

Answer 4

• Many buyers and sellers within the market
• Sellers are price takers
• No barriers to entry - free entry into and exit from the market
• Perfect Knowledge and Information within the market
• Homogenous goods (all goods on the market being sold are the same)
• Firms are short run profit maximisers (and can make SNP in the short run, but not the long run)
• Factors of production are perfectly mobile

Question 5

How is the price set in perfectly competitive markets?

Answer 5

• Firms are price takers in this market and have no price setting power
• The price is simply the equilibrium price between the market supply and market demand (market clearing price)

Question 6

Explain why SNP can be made in the short run in perfectly competitve markets, but not in the long run

Answer 6

• In the short run SNP can be made
• Changes to patterns of consumer demand or changes to the demand of other interrelated goods can lead to an outwards shift in the demand curve in the short run
• This means the market equibrium price rises in the short run
• Given firms are price takers and the market equiblirum price has risen, the price which firms sell at rises above thier ATC.
• This means in the short run they can make SNP
• Given there is perfect information within the market, entreprenuers can see the supernormal profit being made by incumbant firms and therefore have an incentive to join the market - to make some supernormal profit
• Given that there are no barriers to entry to the market, firms can easily enter the market, and do so incentived by the SNP
• This causes the supply in the market to increase, as shown by the shift in the supply curve from S to S1

Question 7

Draw a diagram of perfect competition and label the most important points.

Answer 7

Question 8

What are the downsides of perfectly competitive markets to consumers?

Answer 8

• Higher prices? Small fimrms cannot exploit economies of scale and therefore face higher long run average costs - this is passed onto consumers in the form of higher prices
  For industries where there are large economies of scale - those which could be considered a natural monopoly, perfect competition means that firms will not be able to benefit from these, and so is not benificial in such industries
• Lower quality and higher prices in the long run? - due to lack of innovaton from lack of dynamic efficiency

Question 9

Explain why firms in perfectly competitve markets are price takers

Answer 9

The demand curve in perfectly competitive markets is perfectly elastic because there are so many avaible substitute firms which can be bought from with perfect information
Given that only normal profit is made, if firms lower thier price they will make a loss and have to leave the market

This means that the only price firms can sell at is the equilibrium market clearing price

Question 10

Draw and explain a revenue curve for a perfectly competitive market. How does this inform the AR Curve?

Answer 10

As price is constant (because firms are price takers), MR is constant. This means that an additional unit always fetches the same price in the market. This means that AR is constant, which is why it is flat for a perfect competition diagram

Question 11

Why is the MC curve the supply curve in perfect competition?

Answer 11

In perfect competition firms only make normal profit, and therefore will supply goods and services at the same price that it costs to make them. This means that the supply curve is really just the MC curve. The supply curve also only exists above the shutdown point, ATVC, as below this firms lose money on each unit and so won’t supply. This is shown by the dotted supply curve

Question 12

What are the 3 characteristic of monopolistic competition?

How does this differ from perfect competition?

Answer 12

1. Many small buyers and sellers within the market
2. LOW barriers to entry and exit
3. DIFFERENTIATED products
4. IMPERFECT information in the market

perfect comp:
1. Many small buyers and sellers within the market
2. NO barriers to entry and exit
3. HOMOGENOUS products
4. PERFECT INFORMATION

Question 13

What is a good real life monopolistically competitive market?

Answer 13

The UK’s food takeaway market

Question 14

How is the UK takeaway industry an example of monopolistic competition?

Question 15

How do monopolistic markets compete?

Answer 15

Monopolistic markets compete on non price factors
These include l