Week 5 - Perfect Competitve Market

Question 1

3 Key Characteristics of a Market that influence a firm’s behaviour

Answer 1

1) Concentration - # and size distribution of firms in a market and their market share
2) Product Differentiation - Physical or Subjective differences in a consumer’s mind between rival firm’s products
3) Barriers to Entry - How difficult it is for a new firm to enter a market and compete with existing firms

Question 2

What is a High Concentration + Examples

Answer 2

A small number of firms control a large market share
- Telecommunications and Power Companies

Question 3

What is a Low Concentration + Examples

Answer 3

Large number of firms and no firms have any market power
- Food

Question 4

Example of Product Diffentiation

Answer 4

Feature of a product that sets it apart from similar products (USP)

Question 5

Types of Barrier to Entry + Examples

Answer 5

1) Legal - Government Regulation, Patent Rights
2) Nature - Technical, Costs, Financials

Question 6

Structure of Perfect Competition Market Structure

Answer 6

Concentration: Large number of Sellers
Product Differentiation: Homogeneous Products
Barriers to Entry: Low Barriers

Question 7

Structure of Monopolistic Competition Market Structure

Answer 7

1) Concentration: Many Sellers / Low Concentration
2) Product Differentiation: Differentiated Products
3) Barriers to Entry: Some Barriers

Question 8

Characteristics of Oligopoly Market Structure:

Answer 8

1) Concentration: Few Sellers / High Concentration
2) Product Differentiation: Homogeneous or Differentiated
3) Barriers to Entry: High Barriers

Question 9

Characteristics of Monopoly Market Structure

Answer 9

Concentration: One Seller
Product Differentiation: Unique; no close substitute
Barriers to Entry: High barriers or Blocked

Question 10

Characteristics of a Perfectly Competitive Market

Answer 10

1) Large # of Buyers and Sellers (No impact on price)
2) Price Takers (No influence on price)
3) Homogeneous (identical) products
4) No Barriers to Entry
5) Perfect Information
6) Perfect Mobility of Factor Production

Question 11

Impact of a firm being a price taker

Answer 11

They cannot sell the price below/higher than market, but they can increase or decrease output

Question 12

Why must the demand curve of a firm be perfectly elastic

Answer 12

Since the price is assumed to be unchanged

Question 13

Shape of firm’s demand curve if price taker and price market

Answer 13

1) Price Taker = Perfectly Elastic (constant)
2) Price Maker = Similar to Market Demand curve (sell more by lowering price)

Question 14

Equation for Average Revenue (AR)

Answer 14

TR/Q = P x Q / Q = P

Question 15

What equation do we have under Perfect Competition

Answer 15

P = D = AR = MR

Question 16

Profit is going to be the highest when the difference between TR and TC is

Answer 16

The greatest

Question 17

Profit Maximisation graphically occurs when

Answer 17

MR = MC and MC cuts MR curve from below

Question 18

For Economic Profits we want

Answer 18

TR > TC or pi>0 is when P > ATC

Question 19

What is the Normal Profit Point

Answer 19

Where we have broken-even (P = ATC, TR = TC, pi = 0)

Question 20

How can a firm minimise losses

Answer 20

1) P < ATC = AFC + AVC
2) If P > AVC, firm still produces because at least some of the fixed costs are recovered
3) If P < AVC, firm shuts down as losses get bigger

Question 21

Short run supply curve for a firm under PC is

Answer 21

MC curve above the minimum of the AVC

Question 22

In the LR, firm can

Answer 22

Enter or exist freely in the market, labour and capital and perfectly mobile

Question 23

In LR equilibrium, firms can only

Answer 23

Make a normal profit or zero economic profit

Question 24

What are External Economies

Answer 24

Factors beyond the control of an individual firm lowers costs as the industry expands

Question 25

Example of External Economies

Answer 25

As Computer industry expands, the cost of chips fall

Question 26

What are External Diseconomies

Answer 26

Factors outside the control of a firm that raise the firm’s costs as industry output increases

Question 27

Examples of External Diseconomies

Answer 27

As Wind industry expands, cost of water increases

Question 28

What is a constant-cost industry

Answer 28

In a CCI, entry and exiting in the LR ensures that all firms earn zero profits and the price is P* = ATc minimum

Question 29

What does constant cost industry suggests

Answer 29

All firms have access to the same technology and have the same cost structure, and this cost structure does not change as the industry grows (LR supply curve need not be perfectly elastic)

Question 30

What is an Increasing Cost Industry

Answer 30

Occurs when potential entrants have higher costs than firms already in the market (LRSC can be upward sloping)

Question 31

Why does Increasing costs industry occurs

Answer 31

Some resources used in production may be available only in limited quantities (input prices rise as industry expands)

Question 32

What is a Decreasing-Cost industry

Answer 32

Supposing that as output in an industry expands, cost for all firms fall, LRSC is downward sloping

Question 33

What causes a DCI

Answer 33

Following an increase in demand, as entry will continue until it is no longer profitable, new LR equilibrium price has to be lower than the initial equilibrium price