4.1.5 Perfect competition, imperfectly competitive markets and monopoly

Question 1

What are the two opposite ends of the competition spectrum

Answer 1

Perfect competition to pure monopoly

Question 2

What factors distinguish market structures

Answer 2

Number of firms, degree of product differntiation, and ease of entry

Question 3

What is the primary objective of firms

Answer 3

Profit maximisation

Question 4

What is the satisficing principle

Answer 4

Firms aim for satisfactory outcomes rather than optimal ones

Question 5

How does the divorce of ownership from control affect firms

Answer 5

May lead to different objectives, conduct, and performance

Question 6

What are the characteristics of perfect competition

Answer 6

Many firms, identical products, free entry/exit, and perfect knowledge.

Question 7

Are firms in perfect competition price takers or price makers?

Answer 7

Price takers

Question 8

What is the outcome of perfect competition in terms of efficiency

Answer 8

Efficient allocation of resources

Question 9

What are the main characteristics of monopolistic competition

Answer 9

Many firms, differentitated products and free entry/exit.

Question 10

What type of competition is common in monopolistic markets

Answer 10

Non-price competition (e.g advertising and branding)

Question 11

What are the main characteristics of oligopoly

Answer 11

Few firms, high barriers to entry, and interdependence.

Question 12

What is kinked demand curve model

Answer 12

It illustrates price rigidity due to interdependence among firms

Question 13

What is the difference between collusive and non-collusive oligopoly

Answer 13

Collusive oligopoly involves cooperation, while non-collusive involves independent decision-making

Question 14

What factors influence monopoly power

Answer 14

Barriers to entry, number of competitors, advertising and product differentiation

Question 15

Advantages of monopoly

Answer 15

Eos, potential for innovation

Question 16

Disadvantages of monopolies

Answer 16

Higher prices, inefficiency and reduced consumer choice

Question 17

What conditions are nessecary for price discrimination

Answer 17

Market power, ability to segment markets and prevent resale

Question 18

What are the advantages of price discrimination

Answer 18

Increased profits for firms and potential for more output

Question 19

What are the disadvantages of price discrimination

Answer 19

Consumer exploitation and potential inefficiency

Question 20

What is creative destruction

Answer 20

The process where innovation by new firms disrupts existing markets

Question 21

How do firms compete beyond price

Answer 21

By improving products, reducing costs and enhancing service quality.

Question 22

What is a contestable market

Answer 22

A market with low barriers to entry and exit, allowing “hit-and-run” competition

Question 23

What are sunk costs

Answer 23

Costs that cannot be recovered if a firm exits the market

Question 24

What is the difference between static and dynamic efficiency

Answer 24

Static efficiency focuses on curent resource allocation, while dynamic effiency involves innovation and long-term growth

Question 25

What is productive effieciency

Answer 25

Minimizing average total costs

Question 26

Where is allocative efficiency (on the graph)

Answer 26

Price equals marginal cost (P=MC)

Question 27

What is consumer surplus

Answer 27

The difference between what consumers are willing to pay and what they actually pay

Question 28

What is producer surplus

Answer 28

The difference between the price recieved by producers and the minimum price they are willing to accept

Question 29

How does monopoly affect surplus

Answer 29

It creates deadweight loss, reducing total surplus