Topic 6: Government Intervention in the economy

Question 1

What are the four main market structures?

Answer 1

Pure, monopolistic competition, oligopoly, monopoly

Question 2

What are the conditions of a pure compettion?

Answer 2

• many small buyers and none of them are large enough to have an impact on the mkt P
• all firms sell the same product
• buyers do not have any cost from moving to one supplier to another
• no barriers for new firm entry or an existing firm leaving the mkt
• sellers can sell as much as they want, at the mkt price

eg. fruit&veg, fish mkt

Question 3

What are the conditions of a monopoly?

Answer 3

• there is only one firm selling the product, and there is no mkt competition at all
• the product has no close substitutes
• there are significant barriers to entry, and this effectively prevents any potential competitors from entering the mkt

eg. water supply

Question 4

What are the conditions for monopolistic competition?

Answer 4

• a large number of relatively small firms
• products being sold are similar but not identical (product differentiation)
• differentiated products give firms a degree of price-setting power
• smaller barriers to entry for new firms entering the mkt, including the fact that existing firms have loyal customers through product differentiation

eg. motels, restaurants

Question 5

define product differentiation

Answer 5

when firms make G&S look different from their competitors to increase brand loyalty and give the firm some degree of price-setting power

Question 6

What are the conditions of an oligopoly?

Answer 6

• only a few relatively large firms, each of which has a significant share of mkt
• sell similar but differentiated products
• significant barriers to entry, accounts for the fact that there are only a few firms in the industry

eg. supermarkets, banks, airlines, oil companies