perfect competition,imperfectly competitive markets and monopoly

Question 1

what is a contestable market

Answer 1

occurs when there is freedom of entry and exit into the market

Question 2

characteristics of contestable markets

Answer 2

• low or no barriers to entry
• potential competition
  -free access to production techniques
• low consumer loyalty

Question 3

sunk costs defintion

Answer 3

costs that cannot be recovered once spent

Question 4

why are markets with high sunk costs less favourable

Answer 4

because the risk associated with entering the market is high

Question 5

types of barriers to entry and exit

Answer 5

• economies of scale
• legal barriers such as patents
• vertical integration - if a firm cannot access the supply of the good the market will be less contestable
• predatory pricing
• limit pricing
• consumer loyalty and branding

Question 6

implications of contestable markets on the behaviour of firms

Answer 6

• increase in allocative efficiency
• hit and run competition = whne a new firm enters the market to take advantage of the supernormal profits
• in the long run firms make normal profit which can be used to prevent competition as there is not incentive for new firms to enter