market structures

Question 1

Define perfect competition

Answer 1

market structure with perfect competition, so is highly competitive

Question 2

What are the characteristics of perfect competition

Answer 2

firms are profit maximisers
- firms are price takers
- homogenous goods
- high degree of competition
perfect information
- low barriers to entry and exit

Question 3

If consumers have perfect information, what would they know

Answer 3

Know about prices and quality

Question 4

If producers have perfect information, what would they know?

Answer 4

the best prices, the cost, the best technology

Question 5

Explain why in the LR in perfectly competitive markets, firms make normal profit from supernormal profit in SR

Answer 5

• fringe firms are attracted to the market due to high SNP in SR
• as barriers to entry and exit are low and knowledge is perfect fringe firms can easily enter the market
• this would increase supply, as goods are homogenous, price of goods would fall until SNP becomes normal profits in LR

Question 6

Can you draw a diagram with perfect competition SR profit/subprofit alongside normal profit

Answer 6

yes, two different diagrams of supernormal profit and subnormal profit

Question 7

Explain why in perfectly competitive markets that in the SR subnormal profits turns in normal profit in the LR

Answer 7

• incumbent firms making subnormal profit are profit maximisers and would aim to produce opportunity cost by leaving the market that has low barriers to exit
• as the firm exits, overall supply would fall, in return raises the price of the homogenous good until normal profit is made for firms who stayed

Question 8

Is perfectly competitive market statically efficient and why/why not

Answer 8

yes

due to high degree of competition, if not allocatively. productively and X efficient they would not survive the market

Question 9

What is allocative efficiency

Answer 9

output is at p=mc
This means resources perfectly follow consumers demand
- as a result, prices are low, consumer surplus is high, quality of goods are high, choices are high and quantity of goods are high

Question 10

what is productive efficiency?

Answer 10

producing at lowest point of AC
- means the full exploitation of EOS
low cost of production may be passed onto consumers

Question 11

is perfectly competitive market X efficient or inefficient

Answer 11

x-efficient

Question 12

Why in perfectly competitive markets are firms not dynamically efficiency

Answer 12

Due to lack of profit in long run to innovate
- due to perfect information that competitors would steal their technology and ideas

Question 13

Define monopolistic competition

Answer 13

Mixture of perfect competition and monopolies
Characterised by: low barriers to entry and exit, good information, slightly differentiated goods, high degree of competition, firms are profit maximisers, non-price competition

Question 14

Why in monopolistic market structure is monopoly exploitation limited?

Answer 14

• due to only having slight differentiation they can set prices only a bit
• due to high degree of competition and substitution for their product in the market

Question 15

Examples of monopolistic competition?

Answer 15

hair dressers, restaurants, night clubs

Question 16

Why do monopolistic markets make normal profit in LR

Answer 16

due to low barriers to entry and exit and good information, fringe firms and incumbent firms may enter and leave according to the profits made or loss in SR position

Question 17

In the long run what is the efficiency of monopolistic market?

Answer 17

AE - inefficient
PE - inefficient
DE - inefficient

Question 18

Why do we evaluate the efficiency of the long run position rather than the short run?

Answer 18

as the market is more stable in the long run

Question 19

How can you evaluate that monopolistic competitive markets can be dynamically efficient in LR

Answer 19

if they have enough profits from SR to reinvest

Question 20

In theory monopolistic competition is AE inefficient, how can this be evaluated?

Answer 20

Consumers prefer differentiated goods, they’re willing to pay higher for this

Question 21

Why may P.E being inefficient in monopolistic competition be better than perfect competition being efficient

Answer 21

There is more EOS to exploit in monopolistic competition than perfect competition so AC can be driven down lower.

Question 22

Why may dynamic efficiency be difficult for monopolistic competition in the LR

Answer 22

due to the variety of differentiated goods offered, this is harder to exploit

Question 23

list 3 pros of a competitive market

Answer 23

1. allocatively efficient
2. productively efficient
3. job creation (fall in poverty and inequality)

Question 24

list 4 cons of perfectly competitive markets

Answer 24

• lack of dynamic efficiency (due to low barriers to entry and exit)
• less EOS potential to exploit (many small sized firms)
• cost cutting in dangerous areas
• creative destruction

Question 25

why may a competitive market lead to a lack of dynamic efficiency in the LR?

Answer 25

• competitive markets mean low barriers to entry and exit and good information.
• therefore normal profit is made in the long run
• so technology and quality would lag behind

Question 26

Why may concentrated markets be better than competitive market for consumers

Answer 26

Can provide lower cost to consumers as there is more potential EOS to exploit

Question 27

why may cost cutting be a con in competitive markets

Answer 27

they may reduce cost by exploiting labour or reducing the safety of the environment

Question 28

How can creative destruction occur in competitive markets

Answer 28

• new fringe firms entering bring creative, innovative ideas and lower cost
• destruction occurs to incumbent firms who cannot compete and must shred workers

Question 29

EV - in competitive markets how can creative destruction be reversed

Answer 29

if employees who lost their jobs join fringe firms

Question 30

Ev - how can competitive market firms be dynamically efficient

Answer 30

Reinvesting SNP from SR for small investments

Question 31

When might less competition be better

Answer 31

when there is a natural monopoly

Question 32

Ev - How can reduction in cost in wrong areas be reduced?

Answer 32

upscaling the role of regulation

Question 33

Ev - depending the on the good or service what should society consider to maximise their utility

Answer 33

If the firm should be dynamic or allocatively efficient

Question 34

What is the con of allocatively efficient

Answer 34

a lack of SNP to reinvest and be dynamically efficient in the future

Question 35

Define a natural monopoly

Answer 35

• market structure with a single dominant seller
• huge fixed cost and cost for start up
• huge amounts of EOS to exploit, may not be able to fully exploit
• efficient when their is no competition

Question 36

How does natural monopolies minimise their average cost despite having high total cost (because of infrastructure)

Answer 36

having a high amount of output

Question 37

What is rational for natural monopolies

Answer 37

to have 1 supplier in the market so it is undesirable for there to be competition

Question 38

Why is competition undesirable for natural monopolies

Answer 38

leads to wasteful duplication of resources as new firms cannot compete with the first firm that has high EOS, leading to a waste of resources when they’re priced out

Question 39

What inefficiency does competition lead to

Answer 39

Productive and allocative inefficiency

Question 40

What condition is needed for natural monopolies to be productive and allocatively efficient

Answer 40

regulation

Question 41

What would natural monopolies price their good at

Answer 41

profit maximisation

Question 42

How does regulation low natural monopolies price and increasing output

Answer 42

setting output at allocative efficient, and giving subsidies for losses so natural monopolies make normal profit

Question 43

Why despite being a legal monopoly would Tesco have incentive to lower cost and be efficient

Answer 43

due to the threat of competition

Question 44

list 4 pros of a monopoly

Answer 44

• Dynamic efficiency
• Greater EOS then competitive market, pass on to prices?
• natural monopoly if regulated
• can cross subsidise merit goods

Question 45

list 4 cons of monopoly

Answer 45

• not A.E (deadweight welfare loss, fall in consumer surplus)
• not P.E (DEOS)
• X inefficient (lack of competitive drive)
• increase poverty and inequality

Question 46

list 8 evs for monopolies

Answer 46

• may not be D.E (retain profit or higher dividends)
• EOS and DEOS depends on size
• different objectives
• levels of regulation
• price discrimination
• threat of competition
• natural monopoly
• type of good or service