Topic 4: Market Structure (Perfect Competition and Monopoly)

Question 1

Define perfect competition.

Answer 1

Perfect competition is a market structure that involves many different sellers and buyers.

Question 2

What effect does perfect competition have on the market?

Answer 2

Consumers have many options to choose from so sellers can sell as little or as much as they like at the prevailing market price and their action will have no impact on that price.

Question 3

What is market power?

Answer 3

The ability of an individual supplier to change the market price.

Question 4

Average Revenue is calculated as:

Answer 4

Total revenue/Output

Question 5

Marginal Revenue is calculated as:

Answer 5

Change in total revenue/change in output

Question 6

How much market power does a firm in perfect competition have?

Answer 6

Very little. All sales occur at market prices which does not change as the firm increases output. Average revenue = marginal revenue = price.

Question 7

Name 3 barriers to entry:

Answer 7

1: Control over key inputs
2. Exclusivity granted by governments such as patents
3. The presence of economies of scale that result in a single producer being more efficient than many small firms.

Question 8

How much market power does a monopolist have?

Answer 8

Total power. The monopolist chooses the price as there is no competition. A buyer buys the monopolist’s goods or gets nothing.

Question 9

What is producer surplus?

Answer 9

The difference between what the producer produces and cost of production.

Question 10

How do monopolies happen?

Answer 10

There is only a single supplier of a good that has no easy substitute with a barrier to entry.