TOPIC 4

Question 1

What are the characteristics of perfect competition?

Answer 1

• No barriers to entry/exit
• Perfect information
• Lots of buyers/sellers
• Firms are price takers
• No SN profits in long run
• Homogeneous goods
• FoP are perfectly mobile

Question 2

How is price determined in a perfectly competitive market?

Answer 2

Price is determined by supply and demand

Question 3

What are the positives of perfect competition?

Answer 3

• allocative efficiency
• productive efficiency
• SR supernormal profits could lead to dynamic efficience

Question 4

What are the negatives of perfect competition?

Answer 4

• No economies of scale
• unrealistic model

Question 5

What are the characteristics of a monopoly?

Answer 5

• One buyer/ seller (pure)
• firm is price maker
• SN profit in short and long run
• High barriers to entry/exit
• Price discrimination

Question 6

What is the definition of monopoly power (in the U.K.)?

Answer 6

A firm with more than 25% of market share

Question 7

What is dynamic efficiency?

Answer 7

When new technology improves productivity over time

Question 8

What is X-inefficiency?

Answer 8

When average costs are higher than they should be due to a lack of competition

Question 9

What are the factors influencing monopoly power?

Answer 9

• Brand loyalty
• sole ownership of a resource
• economies of scale
• number of firms
• high barriers to entry
• sunk costa
• advertising

Question 10

What is a natural monopoly?

Answer 10

When a market is most efficient when there is a monopolu

Question 11

What is price discrimination?

Answer 11

When a firm charges different prices to different people for the same good/service

Question 12

What is 1st degree price discrimination?

Answer 12

Each consumer is charged a different price

Question 13

What is 2nd degree price discrimination?

Answer 13

Price changes depending on volume purchased

Question 14

What is 3rd degree price discrimination?

Answer 14

When different groups are charged different prices (eg peak and off-peak)

Question 15

What are the characteristics of monopolistic competition?

Answer 15

• imperfect competition
• low barriers to entry- exit
• lots of buyers/sellers
• non-homogeneous goods (branding)
• firms are price takers
• imperfect information
• lots of substructures
• non-price competition

Question 16

What are the characteristics of an oligopoly?

Answer 16

-high barriers to entry/exit
- few firms dominate market
- high interdependence
- product differentiation
- high concentration ratio

Question 17

What is a cartel?

Answer 17

A group of firms which have agreed to control prices, limit output, or prevent new firms from entering the market

Question 18

What is price leadership?

Answer 18

One firm changes prices and other forms follow

Question 19

What is a price war?

Answer 19

Firms are constantly lowering prices to undercut competition

Question 20

What is nash equilibrium?

Answer 20

The optimum strategy for all players in game theory

Question 21

What does the kinked demand curve show?

Answer 21

Firms have an asymmetric reaction to one firm lowering prices

Question 22

What is collusion?

Answer 22

Forms agree to work together to generate higher prices and profit

Question 23

What are the characteristics of a contestable market?

Answer 23

• Actual and potential competition
• no significant barriers to entry
• new firms have free access to production techniques and technology
• low consumer loyalty

Question 24

What are the positives if a contestable market?

Answer 24

• likely to be allocatively efficient
• less need for govt. intervention
• lower prices

Question 25

What are the negatives of contestable markets?

Answer 25

No dynamic efficiency as firms ideas aren’t protected