Microeconomics - L10 Monopolistic Competition and Monopoly

Question 1

What are the 4 features of a monopolistic competition market?

Answer 1

1. Many buyers and sellers.
2. Products are NOT homogenous (identical)
3. Easy entry and exit
4. Both buyers and sellers are price takers.

Question 2

How does a MCM differ from a PCM?

Answer 2

Products are not homogenous in a MCM whereas in a PCM they are homogenous

Question 3

What impact would a MCM have on prices and why?

Answer 3

Prices would be low because there is a lot of competition and the producer needs to keep prices low to remain competitive.

Question 4

What impact would a MCM have on efficient allocation of resources?

Answer 4

Producers would take care to allocate resources efficiently (eg. reduce waste, labour costs etc) because their goal is to maximise profit. EAR ensures that producers can sell their products at a competitive price and still make a profit.

Question 5

What impact would a MCM have on living standards?

Answer 5

A MCM would increase material living standards because consumers have greater access to goods and services due to producers offering them at a competitive / low price. This would in turn improve non-material living standards because consumers would feel satisfied and content that they can buy more with their income.

Question 6

What are the 4 features of a monopoly?

Answer 6

1. One seller / supplier
2. Product differentiation is not important
3. Barriers to entry and exit extremely high
4. Firm is a price maker.

Question 7

What does market power mean?

Answer 7

The ability of a firm to control or influence prices and the output of an industry.

Question 8

In which type of market do producers/firms have the most market power?
a) PCM
b) MCM
c) M

Answer 8

c) Monopoly

Question 9

What impact would a monopoly have on prices?

Answer 9

Prices will be higher due to no incentive to use resources efficiently as a result of there being no competition.

Question 10

What impact would a monopoly have on living standards?

Answer 10

Material living standards will decrease because onsumers will have to pay more for the good or service which reduces their disposable income and therefore, their access to goods and services.

This in turn reduces non-material living standards because wellbeing and quality of life will also decline due to decreased access to goods and services.

Question 11

A monopoly is unlikely to result in an efficient allocation of resources because…

Answer 11

there is an absence of competition which means the producer can set their own price. There is no incentive to ensure that resources are allocated efficiently as the producer can increase prices to protect profit margin.

Question 12

A monopoly is unlikely to maximize a nation’s living standards because …

Answer 12

Consumers have to pay a greater proportion of their incomes to buy the good or service. This reduces the proportion of their income they have available to purchase other goods and services, reducing their access to goods and services as well as their non-material living standards.