Unit 5 - Perfect Competition, Imperfectly Competitve Markets And Monopoly

Question 1

Market structure

Answer 1

The organisational and other characteristics of a market

Question 2

Entry barriers

Answer 2

Obstacles that make it difficult for a new firm to enter a market.

Question 3

Exit barriers

Answer 3

Obstacle that make it difficult for an established firm to leave a market.

Question 4

Product differentiation

Answer 4

The marketing of generally similar products with minor variations or the marketing of a range of different products.

Question 5

Divorce of ownership form control

Answer 5

The owners and those who control the firm (managers) are different groups with different objectives.

Question 6

Satisficing

Answer 6

Achieving a satisfactory outcome rather than the best possible outcome.

Question 7

Productive efficiency

Answer 7

For the economy as a whole occurs when it is impossible to produce more of one good without producing less of another. For a firm it occurs when the average total cost of production is minimised.

Question 8

Allocative efficiency

Answer 8

Occurs when it is impossible to improve overall economic welfare by reallocating resources between markets. In the whole economy, price must equal marginal cost ( P = MC ) in every market.

Question 9

Allocative inefficiency

Answer 9

Occurs when P>MC, in which case too little of a good is produced and consumed, and when P<MC, in which case too much of a good produced and consumed.

Question 10

Monopoly

Answer 10

One firm only in a market.

Question 11

Market conduct

Answer 11

The pricing and marketing policies pursued by firms. This is also known as market behaviour but is not to be confused with market performance, which refers to the end results of these policies.

Question 12

Cartel

Answer 12

A collusive agreement by firms l, usually to fix prices. Sometimes there is also and agreement to restrict output and to deter the entry of new firms.

Question 13

Price leadership

Answer 13

The setting of prices in a market, usually by a dominant firm, which is then followed by other firms in the same market.

Question 14

Price agreement

Answer 14

And agreement between a firm, similar firms, suppliers or customers regarding the pricing of a good or service.

Question 15

Price war

Answer 15

Occurs when rival firms continuously lower prices to undercut each other.

Question 16

Price discrimination

Answer 16

Charging different prices to different customers for the same product or service, with the prices based on different willingness to pay.

Question 17

Contestable market

Answer 17

A market in which the potential exists for new firms to enter the market. A perfectly contestable market has no entry or exit barriers and no sunk costs, and Both incumbent firms and new entrants have access to the same level of technology.

Question 18

Hit-and-run competition

Answer 18

Occurs when a new entrant can ‘hit’ the market, make profits and then ‘run’, given that there are no or low barriers to exit.

Question 19

Static efficiency

Answer 19

Efficiency ( e.g. productive and allocative efficiency) at a particular point in time.

Question 20

Consumer surplus

Answer 20

A measure of the economic welfare enjoyed by consumers: surplus utility revived over and above the price paid for a good.

Question 21

Producer surplus

Answer 21

A measure of the economic welfare enjoyed by firms or producers: the difference between the price a firm succeeds in charging and the minimum price it would be prepared to accept.

Question 22

Deadweight loss

Answer 22

The loss of economic welfare when the maximum attainable level of total welfare fails to be achieved.