Uplearn Market Structures

Question 1

What are the 5 market structures?

Answer 1

• Monopoly
• Perfect Competition
• Monopolistic Competition
• Monopsony
• Oligopoly

Question 2

What is the N-firm concentration ratio and how do you work it out?

Answer 2

Measures how much market share the N (number) largest of firms have

How to work out:

1. Identify the N largest firms in the market

Add up their market share

Question 3

What is a legal monopoly?

Answer 3

A firm is considered a legal monopoly when its market share is over 25%

Question 4

What is a pure monopoly?

Answer 4

Only one firm in the market has 100% market share.

It is rare, closest is google with 88% market share

Question 5

When modelling monopolies, what do economists assume to simplify things?

Answer 5

• only one firm in the market with a 100% market share
• the firm is a profit maximiser (where MR = MC)
• There are high barriers to entry

Question 6

What are the 5 barriers to entry?

Answer 6

Sunk costs
Legal barriers
Economies of scale
Anti-competitive practices
Brand loyalty

Question 7

What are the legal barriers?

Answer 7

Include patents, trademarks and copyrights - and they allow firms to legally prevent other firms from stealing their ideas and entering their market.

Question 8

What are sunk costs?

Answer 8

costs that cannot be recovered (e.g. advertising)

high sunk costs are barriers to entry as they deter new firms from entering the market because the firm knows if they fail, they won’t be able to recover any of their sunk costs

Question 9

Name the 6 types of internal economies of scale

Answer 9

MMEMOCIC - Richards’s mum flies past the moon

Risk-bearing
Managerial
Financial
Purchasing
Technical
Marketing

Question 10

Define anti-competitive practices

Answer 10

Anything a firm does to reduce or restrict competition

Question 11

Where is profit maximisation on curve?

Answer 11

MC = MR

Question 12

What efficiency is a monopoly?

Answer 12

p inefficient, a and X

possibly dynamic inefficient

Question 13

Why do the government support and own monopolies, if we know monopolies are productive, allocative and X-inefficient?

Answer 13

natural monopoly argument.

A natural monopoly is when it’s naturally most efficient if only one firm is in the market.

E.g. with public transport, it would be very inefficient if London had multiple transport networks, it’s most efficient to have just one (like TFL) in control of everything

Question 14

Define a natural monopoly

Answer 14

when it’s naturally most efficient if only one firm is in the market.

Question 15

Why do natural monopolies exist?

Answer 15

Two reasons:

• high sunk costs
• huge economies of scale

To fully exploit economies of scale and reach its minimum efficient scale, the natural monopoly has to increase its sales massively which it can only do if it’s the only seller in the market

Question 16

Why does marginal cost decrease then increase?

Answer 16

Marginal cost initially decreases because as output increases and more workers are hired, they can specialise; increasing productivity and decreasing marginal cost.

But marginal cost will then increase because diminishing marginal returns will decrease productivity, increasing marginal cost.

Question 17

Explain relationship between AC and MC

Answer 17

AC is a smiley face (U curve) , when MC is below AC, AC decreases, when MC is above AC, AC increases

Question 18

Define price discrimination

Answer 18

When a firm charges different groups of consumers different prices, but for the same good

Question 19

What are the 3 conditions of price discrimination?

Answer 19

The firm must have market power: it must be able to change their prices

The firm must have information on consumers’ elasticities: it must be able to identify which consumers are elastic and which are inelastic

The firm must be able to limit reselling: it must be able to limit elastic consumers from selling cheap tickets to inelastic consumers; like how trains require student IDs or student Oysters, to stop inelastic adult consumers using resold student tickets!

Question 20

What are the 4 features of perfect competition?

Answer 20

• many small buyers and sellers
• no barriers to entry or exit
• homogenous products
• perfect information

Question 21

What is PED at elastic demand?

Answer 21

Between -1 and - infinity