Market Structures 4.1.5

Question 1

Determinants of market structure of firm (BLIND P)

Answer 1

B-Barriers of entry/exit

L-Level of profits

I -Information

N-Number of firms in the market/ Market concentration ratio

D-Degree of power/ Market share

P-Product homogenous

Question 2

Barriers of entry/exit

Answer 2

Cost of entering the market

Long run level of profit determine level of barriers of entry/exit. If the level of profits are abnormal in the long run then more

Question 3

Perfect competition

Answer 3

Barriers of Entry/Exit: Firms are free to enter & exit this requires low sunk costs (low costs, which can’t be recovered when leaving the market e.g. expenditure on advertising).

Level of profit: Level of profit is abnormal in the short-run, which gives incentives for firms to join the market. As the number of firms increase the market concentration ratio decreases.As a result, the same profit is shared between more amount of firms, causing the level of profits to become normal in long-run

Information: Information and knowledge is symmetric & perfect between incumbent firms & new firms and firms & consumers.

Number of firms: Many small firms

Degree of power: Firms are price takers; therefore must accept the market’s prevailing price of their products. The firm’s demand curve is perfectly elastic (horizontal).

Product: Firms produce homogeneous or identical products e.g. foreign exchange markets, many agricultural markets

Question 4

Efficiency of perfect competition

Answer 4

1. ) Allocative efficiency: This is because the long run equilibrium MC=AC, occurs when P=MC.
2. ) Productive efficiency: This is because firms produce at the lowest point on the SRAC.
3. ) X-efficient: Competition between firms will act as a spur to increase efficiency & make sure firms use the best combination of inputs.
4. ) Resources will not be wasted through advertising, because products are homogeneous.

Question 5

Disadvantages of perfect competition

Answer 5

1. ) No scope for economies of scale: This is due to the fact, there are many small firms producing at relatively small amounts.
2. ) Undifferentiated products: This gives limited choice to consumers.
3. ) Limited incentives: With perfect knowledge, there is no incentive to develop new technologies because it will be shared with other companies.
4. ) Limited investment: Lack of abnormal profit will make investment in R&D unlikely; this would be important in an industry such as: pharmaceutical.
5. ) Externalities: If there are externalities in production or consumption, there are likely to be market failure without government intervention.

Question 6

Monopolistic market

Answer 6

Low to no barriers of entry/exit e.g. start up costs, resources etc.

For example: Fast food industry