Theme 3:4.2-3:Perfect competition and Monopolistic competition

Question 1

what are all the types of competition in order from most to least competitive.

Answer 1

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

Question 2

characteristics of perfect competition market.

Answer 2

1) many buyers/sellers
2) homogenous goods
3) firms are price takers
4) no barriers to entry/exit
5) perfect information

Question 3

what is an industry example of perfect competition and how?

Answer 3

Agriculture
-large number of buyers and sellers
-it is easy to buy and sell
-farmers produce a range of homogenous goods

Question 4

Profit maximising equilibrium in the short run and long run:Perfect competition

Answer 4

Supernormal profits cannot last in the long run and market and price mechanism will adjust as no barriers to entry.Competition will reduce supernormal profit to normal profit.

Question 5

characteristics of a monopolistic competition market.

Answer 5

1) many buyers/sellers
2)slightly differentiated products but close substitutes
3)firms are price makers to some extent
4)price elastic products
5)imperfect information
6)low barriers to entry

Question 6

Profit maximising equilibrium in the short run and long
run:Monopolistic competition

Answer 6

in the SR firms are profit maximisers but in the LR they make only normal profit due to new entrants in the market

Question 7

what are the pros of a monopolistic competition market?

Answer 7

-wide variety of choice for consumers
-a more realistic market structure than perfect competition

Question 8

what are the cons of a monopolistic competition market?

Answer 8

-in the LR dynamic efficiency might be limited due to normal profits
-productively efficiency as there is excess capacity and no large economies of scale.

Question 9

monopolistic competition diagram in the SR

Question 10

*perfect competition diagram * the mixed SR and LR one

Question 11

reasons for barriers to entry

Answer 11

(Lloyds TSB)
Legal-insurance, regulations
Technical-start up costs
Strategy
Brand loyalty- the brand itself

Question 12

monopolistic competition diagram in the LR

Question 13

types of efficiency in perfect competition in the SR

Answer 13

-Allocative

Question 14

types of efficiency in perfect competition in the LR

Answer 14

-Allocative and productive

Question 15

why do perfect competition make normal profit in the long run

Answer 15

the more firms means more supply and prices drop which reduces SNP