4.1.5 Market Structure ( Only .1 .2 .3 .6 .8 .10)

Question 1

I

Question 2

What is on the spectra of competition?

Answer 2

PERFECT COMPETITION
IMPERFECT COMPETITION (monopolistic competition, duopoly, oligopoly)
MONOPOLY

Question 3

What is a monopoly?

Answer 3

1 firm producing 100% of market output

Question 4

What is oligopoly?

Answer 4

A few independent firms needing to take account of its rivals’ reactions when deciding its own marketing statergies

Question 5

What is perfect competition?

Answer 5

Large number of buyers and seller
No entry or exit barriers in the long run

Question 6

What does traditional economic theory assume about owners and entrepreneurs who run firms?

Answer 6

Their one business objective is to produce the level of output at which profit is maximised

Question 7

What is the profit maximizing rule?

Answer 7

marginal cost = marginal revenue
MC = MR

Question 8

When do profits rise when output increases?

Answer 8

If MR > MC

Question 9

What is divorce of ownership from control?

Answer 9

The owners and those who control the firm having different objectives

Question 10

What is the consequence of a divorce of ownership from control?

Answer 10

The principal agent problem
Shareholder having a different objective to managers

Question 11

What is the objective for shareholders?

Answer 11

Profit maximization

Question 12

What are examples of Monopolies?

Answer 12

Royal Mail
London red buses

Question 13

What are examples of oligopoly?

Answer 13

• Pepsi and Coke
• Samsung and Apple

Question 14

What are examples of perfect competition?

Answer 14

Gas
Currency
Crypto

Question 15

Why is profit maximization the most important objectives for most firms?

Answer 15

• Dividends for shareholders
• rewards for entreneurship
• Lower prices for consumers
• Can re-invest rather than taking out loans

Question 16

What are other possible objectives for firms?

Answer 16

Profit satisficing
Sales maximization
Revenue maximization
Survival
Corporate Social Responsibility

Question 17

What is satisficing?

Answer 17

Achieving a satisfactory outcome rather than the best possible outcome

Question 18

What are the disadvantages of monopoly?

Answer 18

• Allocative inefficiency leading to higher prices for consumers
• Productive inefficient (voluntarily)
• Creates inequalities

Question 19

What are the advantages of monopoly?

Answer 19

T

Question 20

What is static efficiency?

Answer 20

Efficiency at a particular point in time (productive and allocative)

Question 21

What is dynamic efficiency?

Answer 21

Occurs in the long run
Efficiency leading to the development of new products and more efficient processes that improve efficiency

Question 22

What conditions are required for productive efficiency?

Answer 22

Average cost has to be minimized

Question 23

What conditions are required for allocative efficiency?

Answer 23

Price = MR

Question 24

What type of efficiency are productive and allocative efficienc?

Answer 24

Static efficiency

Question 25

What is dynamic efficiency influenced by?

Answer 25

Reasearch and development
Investment in human and non-human capital
Technological change

Question 26

What are the possible advantages of monopolies?

Answer 26

• They earn huge abnormal profits which can be invested in research and development -> more creativity and innovation -> consumers get a wider range of better quality products -> increases international competitiveness
• Lower cost per unit -> so competitive prices for consumers -> economy of scale

Question 27

What is monopoly power influenced by?

Answer 27

• Huge barriers to entry
• number of competitors
• degree of product differentiation
• advertising

Question 28

What are price takers?

Answer 28

Firms operating in perfectly competitive markets which cannot influence the market price
And therefore have to maximize profits using output

Question 29

How does perfect competition lead to efficient allocation for resources?

Answer 29

Because perfect competition is characterized by dynamic and static efficiency

Question 30

How would large numbers of producers affect firm and industry behavior?

Answer 30

• Behavior of Firms: Each firm in the industry is a price taker, meaning it cannot influence the market price. Firms focus on maximizing profits by adjusting their output levels.
• Industry Behavior: High competition keeps prices in check, preventing any single firm from dominating the market. Profit margins tend to be slim due to competition.

Question 31

How would identical products affect firm and industry behavior?

Answer 31

Behavior of Firms: Firms produce homogeneous products, making price the key differentiator. Advertising and product differentiation play a minimal role.
• Industry Behavior: Consumers perceive products as perfect substitutes, leading to a focus on price competition. This enhances allocative efficiency as resources are directed to where they are most valued.

Question 32

How would perfect knowledge affect firm and industry behavior?

Answer 32

Behavior of Firms: Firms and consumers possess complete information about prices, costs, and product quality. This enables rational decision-making.
• Industry Behavior: Efficient outcomes are achieved as both buyers and sellers have perfect information. Prices reflect true costs, leading to allocative efficiency

Question 33

What are the short-run benefits of competition?

Answer 33

• Lower prices for consumers
• Innovation to differentiate products
• Efficient resource allocation

Question 34

What are the long-run benefits of competition?

Answer 34

• Lower cost of production due to research having to be done
• Dynamic efficiency

Question 35

What is creative destruction?

Answer 35

new innovations and technologies replace established methods, products and firms

Question 36

what are examples of creative destruction?

Answer 36

Firm exit
Resource reallocation

Question 37

What other basis’ do firms compete for - other than price?

Answer 37

Quality
Reduced costs