Market Structures

Question 1

Characteristics of Perfect Competition (6) + Examples

Answer 1

1. Perfect Information
2. Profit Maximisers
3. Homogenous Products
4. Price Takers
5. Low/No barriers to entry/exit
6. Large number of buyers and sellers

Examples: Financial markets, Agriculture

Question 2

Characteristics of Monopolistic Competition (5) + Examples

Answer 2

1. Asymmetric Information
2. Profit Maximisers
3. Differentiated Products
4. Low/No barriers to entry/exit
5. Large number of buyers and sellers

Examples: Restaurants, Taxis, Hairdressers, Building companies

Question 3

Characteristics of Oligopolies (8) + Examples

Answer 3

1. Asymmetric Information
2. Profit Maximisers
3. Differentiated Products
4. Price Makers
5. High barriers to entry/exit
6. Potential for collusion
7. Interdependence between firms
8. High concentration ratio

Examples: Supermarkets, Oil, Airlines, Streaming Services

Question 4

Characteristics of Monopolies (7) + Examples

Answer 4

1. Profit Maximisers
2. Limited consumer choice
3. Sole seller in market
4. Price Makers
5. High barriers to entry/exit
6. Abnormal profits in SR & LR
7. Possible price discrimination

Examples: National Rail, Electricity, Google, Amazon

Question 5

What are the Types of Demand Curves for the 4 Types of Competition

Answer 5

1. Perfect Competition:
   - Horizontal
2. Monopolistic Competition:
   - Downwards Sloping (Elastic)
3. Oligopoly:
   - Kinked/Downwards Sloping (Inelastic)
4. Monopoly:
   - Downwards Sloping (Inelastic)

Question 6

Describe SR to LR Perfect Competition

Answer 6

SR:
- Market price is determined by forces of S&D
- Price must be taken by all firms (price takers)
- individual firms face a horizontal demand curve (AR = MR)
- Firms aim to maximise profit (MC = MR)
- if AR > AC, firms earn abnormal profit

Transition Period:
- Existence of abnormal profit in SR is attractive to new firms who enter industry to appropriate profit
- Entry of new firms ↑ supply to market
- Market prices fall and AR/MR curve for firms fall

LR:
- Process continues until normal profits are earned
- Profit max point is at point AR = AC
- In LR, normal profits are earned and firms are both productively and allocatively efficient

Question 7

Describe SR to LR Monopolistic Competition

Answer 7

SR:
- In SR, firms can earn abnormal profit
- However, this does not lead to productive or allocative efficiency
- Existence of SR abnormal profit is attractive to new firms
- Firms enter market due to low entry barriers

Transition Period:
- Individual demand curve (AR) for incumbent firms shifts left
- This is due to a ↓ in market share

LR:
- AR curve for incumbent firms continues shifting left until it reaches a tangent with the AC curve
- This results in normal profit being earned
- Final outcome in LR is that firms only earn normal profits and outcome doesn’t lead to productive or allocative efficiency