Market Structures Exam

Question 1

Monopolistic competition

Answer 1

Is close to perfect competition, as it has many small firms competing with each other, with low barriers to entry.

Legally a monopoly with 25% of the market

Pure monopoly: ONE firm controls entire market for a well defined product e.g. Microsoft

Question 2

Barriers to entry

Answer 2

Something that prevents a new firm from entering the industry.

E.g. Technical barriers (startup/ capital costs)

EoS
Legal barriers - patents/licences
Branding/advertising

Question 3

Product differentiation

Answer 3

Each firm has a small degree of monopoly power because of product differentiation. More inelastic demand curve owing to Customer loyalty.

Demand curve slopes downwards compared to perfect competition

Question 4

Short run monopoly profits

Answer 4

When average revenue is above average costs there are short run monopoly profits.

This allows price increases without loss of customers

Question 5

Profit

Answer 5

Total revenue - total costs

Total costs:
Explicit; FC and VC
Implicit; opportunity cost

(Economist vs accountant)

Question 6

Normal profit

Answer 6

The minimum level of profit required to keep factors of production in their current use

AR=AC

Question 7

Super normal

Answer 7

Any profit made above normal profit.

AR>AC

Question 8

Subnormal

Answer 8

Not enough profit to cover the opportunity cost in production

AR

Question 9

Cost of monopolistic competition

Answer 9

Advertisement

Question 10

Oligopoly

Answer 10

Where a few firms dominate the market.

Wants market largest market share.

Does not happen in perfect competition.

Question 11

5 oligopoly competition methods

Answer 11

Frightened of price wars (which cause profits to be slashed / bankruptcy) - there is price rigidity.

Complete through non price competition.

• advertising
• innovation (new products/cheaper way of making a product)
• more take overs: big firms buy up little firms. Gain EoS, Mir market share.
• tempted to collide: secret agreements to restrict competition. E.g. Fix prices / divide the market. Illegal but allows firms to act as monopolies. CARTEL

Question 12

Oligopoly negatives

Answer 12

1. Allocative efficiency:
   2productive efficiency: managers become lazy cos of low competition
   3Equity: consumer surplus is reduced (pay for inefficiency and advertisement)

Question 13

Oligopoly benefits.

Answer 13

Dynamic efficiency:

I.e. Econ growth

Gains from innovation
Huge in the Long Run

Question 14

Perfect competition

Answer 14

0% market concentration

Many buyers and sellers

Homogeneous goods (identical)

Perfect information

No barriers to entry

Firms: profit maximisers
Consumers: Utility maximisers