Spectrum Of Competiton

Question 1

What is a monopoly?

Answer 1

One seller in the market

Question 2

What are the characteristics of a monopoly?

Answer 2

Price maker
Price discrimination
High barriers to entry and exit
Profit max ( they earn high profits long run and short run)

Question 3

What is it called when a firm has over 25% market share? Examples?

Answer 3

Monopoly.
Google dominates search engine with 90% market share

Question 4

What is one way to gain monopoly power?

Answer 4

Lots of sellers in the market

Question 5

What is an example of an oligopoly market?

Answer 5

Supermarkets

Question 6

What factor leads to monopoly power?

Answer 6

Barriers to entry

Question 7

Give examples of barriers of entry?(9)

Answer 7

Owning a resource
Economies of scale
Limit pricing
Sunk costs
Brand loyalty
Set up costs
Number of competitors
Advertising
The degree of product differentiation

Question 8

How does reaching economies of scale lead to monopolistic power?

Answer 8

As firm grows larger the average costs of production decrease.
Existing large firms have an advantage to new entrants allowing them to maintain monopoly power.
Deters new firms from entering the market because they are unable to compete.

Question 9

How does limit pricing lead to monopoly power?

Answer 9

Firm sets the price of their good lower than the production costs of new entrants to make sure they cant enter profitability.

Question 10

How does owning a resource lead to monopoly power? Give an example

Answer 10

New entrants can gain monopoly power by gaining control of a resource. E.g BT has ownership of all network cables in uk so new entrants find it difficult to enter the market

Question 11

How do sunk costs and brand loyalty lead to monopoly power?

Answer 11

Sunk costs are unrecoverable costs like advertising. If they are to high new entrants wont enter the market because they are unable to compete because if they are unable to compete they don’t get the value of their goods back.

If consumers are loyal to a brand - can be increased with advertising then it’s difficult for new firms to gain market share.

Question 12

How can set up costs lead to monopoly power?

Answer 12

If it’s expensive to establish the firm then new firms wont enter the market e.g aeroplane companies.

Question 13

How can setup costs lead to monopoly power?

Answer 13

If it’s expensive to establish the firm then new firms wont enter the market e.g aeroplane companies.

Question 14

How can number of competitors lead o monopoly power?

Answer 14

The fewer the number of firms the lower the barriers to entry and harder to gain market share.
When there are a few firms each individual company has a larger market share allowing them to exert more influence over pricing

Question 15

How can advertising and product differentiation lead to monopoly power?

Answer 15

Advertising increases consumer loyalty making demand price inelastic and creating a barrier to entry.
The more a product can be differentiated through quality, pricing and branding the easier it is to gain market share. Because the more unique a product is the less competitors it will face.

Question 16

What is an oligopoly?

Answer 16

Small number of firms have a larger amount of control over the market.

Question 17

What are oligopoly?

Answer 17

Small number of firms have a larger amount of control over the market.

Question 18

What 4 factors are found in oligopoly market? Explain them

Answer 18

High barriers to entry and exit- these make market less competitive
High concentration ratio- few firms supply majority of market e.g like uk supermarkets. The higher the concentration ratio the less competitive
Interdependence of firms - actions of one firm affect other firms behaviour
Product differentiation - differentiate their products using branding.

Question 19

What does a monopolistic ally competitive market have? Are they short run or long run profit maximisers?

Answer 19

Imperfect information and short run profit maximisers

Question 20

In imperfection competition are products homogenous

Answer 20

No they are non homogenous

Question 21

What is the imperfect competition model based?

Answer 21

Larger number of buyers and sellers which are small and act independently
Each seller has the same degree of market power to other sellers but their market power is weak

Question 22

How do firms compete in monopolistically competitive market

Answer 22

Non price factors

Question 23

Are there barriers to entry and exit in monopolistically competitive markets?

Answer 23

No

Question 24

What does the downward slope show?

Answer 24

The firm can raise their prices and they won’t loose all their customers because they have a degree of price setting power

Question 25

What kind of information do they have in monopolistically competitive markets?

Answer 25

Imperfect information

Question 26

Examples of imperfect information

Answer 26

Hairdressers

Question 27

What are the 6 characteristics of perfect competition?

Answer 27

Price takers Many buyers and sellers Perfect knowledge Homogenous goods Firms are short run profit maximisers Free entry and exit from the market

Question 28

What is price determined by?

Answer 28

Interaction of supply and demand

Question 29

How do existing firms profits get competed away in perfect competition?

Answer 29

Profits are likely to be lower than a market with a few larger firms. Because each firm in competitive market have a small market share and their market power is small. If the firms make a new profit new firms will enter the market due to low barriers of entry because the market seems profitable.The new firm will increase supply in the market which lowers the average price. This means that the existing firms profit will be competed away.

Question 30

What is a commodity?

Answer 30

Raw material used to manufacture consumer products e.g wheat ,coal, gold and sugar

Question 31

Explain the short run equilibrium model and draw it

Answer 31

The firm is a price taker and accepts industry price of P1 In the short run the firm produces an output of Q1. The shaded area is supernormal profits earned in the short run. It is assumed firms are short run profit maximisers.

Question 32

Draw and explain long run equilibrium for a perfectly competitive market?

Answer 32

The supernormal profits made by existing firms means that new firms want to enter the industry. Since there are no barriers to entry in a perfectly competitive market new firms are able to enter the industry. This causes supply in the market to increase shifting supply curve from s to s1. The price level falls as a consequence. Since firms are price takers they must accept this new lower price. In the long run supernormal profits have been established. So firms only make normal profits in the long run. The new equilibrium is p=mc and new output is at Q2 in the long run.

Question 33

What are the advantages of perfectly competitive market?

Answer 33

Firms produce at the bottom of AC which is productive efficiency In the long run prices are lower. P=MC so there is allocative efficiency.

Question 34

What are the disadvantages of perfectly competitive markets?

Answer 34

Firms are small there a few or no economies of scale The assumption of the model rarely apply in real life. In reality branding product differentiation adverts and positive and negative externalities mean competition is imperfect.

Question 35

What is cost plus pricing?

Answer 35

When a retailer wants to know the gross pr