markets

Question 1

1. Monopolistic competition assumption

Answer 1

There are many small buyers and sellers
Low barriers to entry or exit
Differentiated goods

Question 2

1. Oligopoly assumptions

Answer 2

The market is dominated by a few large sellers
High barriers to entry/exit
Differentiated goods
Interdependence between firms

Question 3

1. Collusion

Answer 3

When two firms work together to limit competition (e.g. price-fixing).

Question 4

2. Overt collusion

Answer 4

When there’s a formal agreement between firms to limit competition .

Question 5

3. Tacit collusion

Answer 5

When there’s an unspoken agreement between firms to limit competition.

Question 6

1. Price wars

Answer 6

When firms undercut each other with lower prices to steal the other firms’ consumers.

Question 7

2. Predatory pricing

Answer 7

When a firm aggressively cuts its prices below AVC to force out competitors from the market.

Short-run: firm incurs a loss

Long run: firm forces out its competitors, so they can take over the market.

Question 8

3. Limit pricing

Answer 8

When an incumbent firm uses its economies of scale to set a price low enough to limit new firms from entering.

Small new firms, without economies of scale, won’t be able to compete so they’ll stay out of the market.

Limit pricing is a barrier to entry

Question 9

1. Non-price competition

Answer 9

When firms compete without changing price, e.g:

Advertising
Loyalty cards
Branding
Quality

Question 10

1. Contestable market

Answer 10

A market with low barriers to entry/exit.

Question 11

2. Contestability

Answer 11

How easy it is to enter a market.

Question 12

3. Hit & run competition

Answer 12

In contestable markets, if an incumbent firm is making supernormal profit in the short run, new firms will enter (or “hit”) industry.

They’ll undercut the incumbent firm to steal away its consumers and make supernormal profit.

To get rid of the new entrants, the incumbent firm has to set price = AC so only normal profit can be made. New firm will then leave the market (“run”) because supernormal profit is gone.

Question 13

1. Monopsony

Answer 13

A monopsony is when there’s only one dominant buyer in the market

E.g. the NHS is the only dominant buyer of doctors in the UK

Question 14

2. Minimum wage

Answer 14

A minimum wage is the lowest wage a firm can legally employ a worker for.

E.g. for over-25s in the UK, the national minimum wage is £7.50

Question 15

3. Trade union

Answer 15

A trade union is a group of workers who collectively bargain to improve employee welfare.

E.g. the NUT, the National Union of Teachers, who have previously gone on strikes to bargain for higher pay from the government

Question 16

4. Maximum wage

Answer 16

A maximum wage is the highest wage a worker can legally be employed for.

Question 17

5. Occupational immobility

Answer 17

Occupational immobility is when workers can’t move between different jobs (or occupations) because they lack the skills needed.

Question 18

6. Geographical immobility

Answer 18

Geographical immobility is when workers struggle to move between different areas.

Question 19

benefits of collusion

Answer 19

• increases profits
• increases market share as they may be price makers can predatory price to reduce competition
• producer collusion with lead to an increase in quality of life

Question 20

disadvantages of collusion

Answer 20

• illegal - fined shamed
• limits competition, lack of efficiency
• damages consumer welfare

Question 21

what does price regulation do

Answer 21

limits price increase for consumers

Question 22

2 types of price cap

Answer 22

RPI +k and RPI -X

Question 23

what does RPI + K mean for the firm

Answer 23

Can increase in line with inflation and then an extra amount for supernormal profit to reinvest eg thames water

Question 24

how does RPI - X work

Answer 24

Increase price in line with inflation but due to firms with a large market share they may be more inefficient so a little of that percentage cut to increase efficiency eg energy firms

Question 25

4 ways UK government can control oligopolies

Answer 25

• price caps
• FInes for collusion
• Deregulation
• subsidies to new firms until they reach economies of scale

Question 26

Evaluation points for collusion

Answer 26

• time lag
• no penalties for whistle blowers
• tacit collusion
• charging too high will reduce competition

Question 27

3 reasons why profit maximising is important

Answer 27

• to reinvest
• to make sure you dont go below shutdown point
• owners r paid in shares as well as share holders

Question 28

natural monopoly example

Answer 28

thames water charging only a fraction of a penny per litre

Question 29

trade union example

Answer 29

2015 london tube strike cost £300 million in lost outut

Question 30

how much higher are trade union wages than average workers

Answer 30

17%

Question 31

3 ways how trade unions help

Answer 31

• bargain for better conditions and training
• higher wages
• collective strike disrupts production so is more effective

Question 32

3 ways TU’s may not be effective

Answer 32

• earn £200-£300 a week while sstriking
• large supply of labour
• may outsource than pau higher wages

Question 33

what does it mean in a monopolistic market to have differentiated goods

Answer 33

• price-makers but only by a bit because there are many substitutes
• means demand is elastic