Market Structures

Question 1

What are the conditions of a perfectly competitive market?

Answer 1

• There is an infinite number of suppliers and consumers
• Consumers & producers have perfect information
• Products are identical (homogeneous)
• No barriers to entry or exit
• Firms are profit maximisers

Question 2

In perfect competition what is a market’s demand curve?

Answer 2

Marginal Utility = Demand

Question 3

In perfect competition what is a market’s supply curve?

Answer 3

Marginal cost = supply

Question 4

Where is allocative efficiency in a perfectly competitive market?

Answer 4

When MC = MU

Question 5

What will happen to supernormal profits in the long run, in perfect competition?

Answer 5

They will not be made by any firm

Question 6

What does it mean if AR < AC?

Answer 6

The firm is making a loss

Question 7

What happens to a firm if AR > AVC?

Answer 7

They can still continue to trade temporarily

Question 8

What happens to a firm if AR < AVC?

Answer 8

The firm will leave the market immediately

Question 9

What is productive efficiency?

Answer 9

When a firm is producing at its maximum output with the lowest possible cost

Question 10

What is X - efficiency?

Answer 10

A measure of how successful a firms is in keeping its costs down

Question 11

What assumption is made when markets are achieving productive efficiency?

Answer 11

That there are no economies of scale

Question 12

What is dynamic efficiency?

Answer 12

Improving efficiency in the long run

Question 13

What is static efficiency?

Answer 13

When productive and allocative efficiency are achieved at the same time

Question 14

What is a barrier to entry?

Answer 14

A potential difficulty or expense a firm may have to face to enter a market

Question 15

What are some things existing firms can do to create barriers to entry?

Answer 15

• Patent new technology needed for the business so other firms can’t copy the design
• Strong branding means existing firms are well known so customers will choose them

Question 16

What are some barrier to entry created due to the nature of the industry?

Answer 16

• Market may be capital intensive and require a huge amount of capital before any profit can be made
• New firms will have to be producing at a higher point on the average cost curve than other existing firms, meaning they will have to charge higher prices making them look less attractive

Question 17

What are some barrier to entry created due to government regulations?

Answer 17

• If the production of the product requires a licence
• If there is some planning permissions that need to be approved for factories

Question 18

What is a monopoly?

Answer 18

A market with only one firms in it

Question 19

Drawbacks of monopolies?

Answer 19

• There is no need for a monopoly to innovate or respond to changing consumer preferences, so they get complacent
• There is no need to increase efficiency, so X - efficiency can stay high
• Consumer choice is restricted
• Monopsonist power may be used to exploit suppliers

Question 20

What is a monopsony?

Answer 20

A market with a single buyer

Question 21

What are the conditions of monopolistic competition?

Answer 21

• Some product differentiation
• Seller has some degree of price making
• Demand curve slopes downwards
• demand is more price elastic
• Either no or low barrier to entry

Question 22

When can supernormal profits be made in a monopoly?

Answer 22

In the short run

Question 23

What is a contestable market?

Answer 23

A market that is open to new competitors

Question 24

What are the characteristics of a contestable market?

Answer 24

• Barrier to entry & exit are low
• Supernormal profits could be made by new firms, but only in the short run.