Market Structures

Question 1

Factors that Determine Market Structure

Answer 1

Number of firms
Product Differentiation
Ease of entry
Extent to which knowledge is perfect
Influence of firms on price

Question 2

Define barrier to entry

Answer 2

Obstacles that make it difficult for a new firm to enter a market

Question 3

Define Sunk costs

Answer 3

Costs that have already been incurred and cannot be recovered

Question 4

Define Minimum Efficient Scale

Answer 4

MES: Lowest quantity of output at which productive efficiency occurs

Question 5

Define Returns to scale

Answer 5

The quantitative change in the output of a firm or industry resulting from a proportionate increase in all inputs.

Question 6

Explain the Divorce of ownership and control

Answer 6

The owners and those who manage the firm are different groups with different objectives

Question 7

List the features of a perfectly competitive market

Answer 7

Many small firms
Homogenous Goods
All firms are price takers
Perfect Knowledge
Freedom of Entry and Exit
Large numbers of buyers
Factors of production are completely mobile

Question 8

Where is quantity for short-run profit maximisation?

Answer 8

Q is where MC=MR

Question 9

Define Normal Profit

Answer 9

The minimum profit that a firm must make to stay in business. This is insufficient to attract new firms into the market

Question 10

Define supernormal profit

Answer 10

Profit above normal profit, neccesary for investment

Question 11

Define Allocative efficiency and where price must be to occur

Answer 11

Occurs when it is impossible to improve the overall economic welfare by reallocating resources between markets, price must equal marginal cost for this

Question 12

Define Dynamic efficiency

Answer 12

Efficiency over time, innovation, R and D, etc.

Question 13

List the features of a monopoly

Answer 13

Only one firm
Complete barriers to entry and exit
Firm is a price maker
We assumer monopolist is a short-run profit maximiser

Question 14

Why are monopolists productively inefficient

Answer 14

They have no incentive as supernormal profits would not be maximised at the lowest average costs

Question 15

Advantages of a monopoly

Answer 15

Means for dynamic efficiency
Natural Monopolies
Internationally competitive

Question 16

Disadvantages of a monopoly

Answer 16

Allocative inefficiency
Productively inefficient
Prices rise
Underconsumed
Deadweight loss

Question 17

Define deadweight loss

Answer 17

A loss of welfare arising from a misallocation of resources

Question 18

List the features of a natural monopoly

Answer 18

There is only room for one firm to fully exploit the economies of scale available
The firm never fully exploits the economies of scale

Question 19

Define price discrimination

Answer 19

Charging different prices to different customers for the same product or service, with the prices based on the willingness to pay

Question 20

List the Conditions necessary for price discrimination

Answer 20

Easy to identify different groups of customers
Different customers must have different price elasticities of demand
Must be able to prevent resale
Needs to be a price maker