Micro 14 - Objectives of Firms, Perfect Competition and Monopoly

Question 1

Spectrum of competition between different market types - most to least competitive, least to most concentrated.

Answer 1

1. Perfect competition.
2. Monopolistic competition.
3. Oligopoly.
4. Monopoly.

Question 2

How to distinguish between different market structures

Answer 2

1. No. of firms operating in that industry.
2. Degree of product differentiation.
3. Ease of entry.

Question 3

How is the competitiveness of an industry measured?

Answer 3

> Concentration ratios

Question 4

Concentration ratios

Answer 4

> Concentration ratios measure the percentage of the market share that is held by the largest firms in an industry.
E.g. A C2 concentration ratio calculated the market share of the 2 largest firms, C3 of the largest 3 firms and so on.

Question 5

How can market share be measured?

Answer 5

> Market share can be measured by:

1. The % of sales revenue.
2. % of total output in units.
3. % of total labour employed.

Question 6

The higher the concentration ratio…

Answer 6

the less competitive the market.

Question 7

Legal Monopoly (UK) - definition

Answer 7

> A firm which has 25% or more of the market share.

Question 8

Dominant Monopoly - definition

Answer 8

> A firm which has 40% or more of the market share.

Question 9

Pure/Perfect Monopoly - definition

Answer 9

> A firm which is the only producer in a market with 100% market share.

Question 10

Natural Monopoly - definition

Answer 10

> The firm which produces a good or service in the most efficient way in an industry.

Question 11

Assumptions of markets

Answer 11

> In a perfectly competitive market it is assumed that the marginal cost curve is the supply curve for the firm.
This isn’t usually the case for a monopoly.
In both monopolies and perfect competition, the AR curve is the demand curve.

Question 12

Monopoly Key Characteristics - No. of firms

Answer 12

> One seller dominating the market - pure monopoly, monopoly power.

Question 13

Monopoly Key Characteristics - barriers to entry

Answer 13

> Difficult barriers of entry/exit.

Question 14

Monopoly Key Characteristics - information

Answer 14

> Imperfect information.

Question 15

Monopoly Key Characteristics - product homogeneity/differentiation

Answer 15

> Higher

Question 16

Monopoly Key Characteristics - price-maker or taker?

Answer 16

> Price-maker

Question 17

Monopoly Key Characteristics - extra

Answer 17

>Not AE: charging a price greater than MC, exploiting consumers.
>Not PE.
>Statically inefficient.
>High profit.
>Is dynamically efficient.

Question 18

Monopoly power

Answer 18

> A firm is said to have ‘monopoly power’ if it dominated an industry and as a consequence is able to have a significant influence over the price of goods and total level of output in the industry.

Question 19

Perfect Competition Key Characteristics - no. of firms

Answer 19

> Many buyers and sellers (infinite).

Question 20

Perfect Competition Key Characteristics - barriers to entry

Answer 20

> No barriers to entry/exit.

Question 21

Perfect Competition Key Characteristics - information

Answer 21

> Perfect information

Question 22

Perfect Competition Key Characteristics - product homogeneity/differentiation

Answer 22

> Homogenous goods.

Question 23

Perfect Competition Key Characteristics - price-taker or maker

Answer 23

> Price-taker as all goods are the same so they can be undercut.

Question 24

Perfect Competition Key Characteristics - extra

Answer 24

> In the short-run: supernormal profit. As the supernormal profits cause more firms to enter, supply shifts right until price is lowered.
Long-run: normal profit.

Question 25

Q. With an appropriate diagram, explain why a firm in perfect competition will be unable to make supernormal profit in the long run. 9 marks.

Answer 25

1. Supernormal profit.
2. More firms enter.
3. Supply curve shifts right.
4. Price lowers as they are price-takers.
5. Continues until no more supernormal profits are made and they are reduced to normal profits in the long-run.

Question 26

Monopolies and market failure

Answer 26

> Monopolies that aim to maximise profits can be said to lead to market failure.

Question 27

Natural monopolies

Answer 27

> Natural monopolies occur when there are very high fixed costs or start-up costs, so that AC and MC consistently fall indefinitely with every increase in output.
These industries (e.g. railways, roads, infrastructure) benefit from very significant economies of scale.
It is argued that such industries should run as monopolies as this is the most efficient way of producing the good or service.

Question 28

Monopoly power -definition

Answer 28

> The ability of a firm to be a ‘price-maker’

and influence the price of a particular good in the market.