Microeconomics - Contestable And Non Contestable Markets

Question 1

Characteristics of contestable markets:

Answer 1

Contestable markets face actual and potential competition.

Entrants to contestable markets have free access to production techniques and
technology.

There are no significant entry or exit barriers to the industry.

For example, there will
be no sunk costs in a contestable market.

There is low consumer loyalty.

The number of firms in the market varies.

Question 2

Types of barrier to entry and exit:

Answer 2

Barriers to entry aim to block new entrants to the market. it increases producer surplus and reduces contestability.

The greater the economies of scale that a firm exploits, the less likely it is that a new firm will enter the market. This is because they would produce comparatively
expensively, so they cannot compete.