6.3 MARKET STRUCTURES

Question 1

MARKET STRUCTURE

Perfect market

Answer 1

Control over price

#Number of Firms / Businesses
So many that no single business can influence the market price

#Nature of product
Products sold on the market are homogeneous, e.g. maize

#Entrance
Entry is completely free

#Market Information
Both buyers and sellers have full knowledge of all the prevailing market conditions

#Collusion
Impossible. Sellers act independently from each other.

Price taker - no control cover price
The market determines the price for the individual firm

#Output demand curve for firms’ / businesses product.
The demand curve for the perfect competitor is horizontal - (Perfectly elastic)

#Economic profit
The perfect competitor can realise economic profits in the short term Abnormal profits will attract
new entrants into the market for both structures
Both perfect market and monopoly can only realise normal profits in the long term The price for the product for both market structures equals the average cost The perfect competitor does produce the ideal production quantity and has no surplus capacity

Question 2

Allocative efficiency: (Also called Pareto efficiency)

Answer 2

• It is where goods and services are allocated in the most efficient manner.
• Allocative efficiency is obtained when a distribution strategy exists where one
party’s situation cannot be improved without making another party worse off.

Question 3

Productive efficiency (Technical efficiency):

Answer 3

• The production of goods and services in the least costly way and without wasting scarce resources.

Question 4

MARKET STRUCTURE

Number of businesses

Answer 4

Perfect competition:
So many that no single business can influence the market price

Monopoly:
ONE Seller and many buyers

Oligopoly
Small number of businesses / sellers.

Monopolistic competition
Large number of businesses / sellers.

Question 5

MARKET STRUCTURE

nature of product

Answer 5

Perfect competition
Products sold on the market are homogeneous.

Monopoly
Products / services are unique with no close substitutes

Oligopoly
Products are homogenous or differentiated.

Monopolistic competition
Products are differentiated.

Question 6

MARKET STRUCTURE

Entrance

Answer 6

Perfect competition
Entry is completely free

Monopoly
Entry is completely restricted or blocked.

Oligopoly
Entry into the market varies from free to restricted.

Monopolistic competition
Free entry and exit into the market.

Question 7

MARKET STRUCTURE

Market information

Answer 7

Perfect competition
Both buyers and sellers have full knowledge of all the prevailing market conditions.

Monopoly
Buyers and sellers have full knowledge of all the prevailing market conditions. (Complete)

Oligopoly
Incomplete information between buyers and sellers.

Monopolistic competition
Information for buyers and sellers is incomplete.

Question 8

MARKET STRUCTURE

Collusion

Answer 8

Perfect competition
Impossible. Sellers act independently from each other.

Monopoly
Irrelevant, only one firm.

Oligopoly
Collusion is possible.

Monopolistic competition
There are many sellers / producers and this makes collusion impossible.

Question 9

MARKET STRUCTURE

Control over price

Answer 9

Perfect competition
Price taker - no control cover price
The market determines the price for the individual firm.

Monopoly
Is regarded as a price maker has some control over price, Prices not determined by market forces of supply and demand but by the business itself.

Oligopoly
Have control over prices. They are price makers.

Monopolistic competition
Businesses have little control over prices of products.

Question 10

MARKET STRUCTURE

Output demand curve for firms’

Answer 10

Perfect competition
The demand curve for the perfect competitor is horizontal - (Perfectly elastic)

Monopolistic
Demand curve slopes downward and it equals the market demand curve.

Oligopoly
Demand curve is downward sloping.

Monopolistic competition
Demand curve is downward sloping.

Question 11

MARKET STRUCTURE

Economic profit

Answer 11

Perfect competition
•The perfect competitor can realise economic profits in the short term.
•Abnormal profits will attract
new entrants into the market.
•Perfect market can only realise normal profits in the long term
•The price for the product equals the average cost
•The perfect competitor does produce the ideal production quantity and has no surplus capacity

Monopoly
•The monopolist also realise economic profits in the short term
•The monopolist will charge a higher price than the perfect competitor
•The monopolist will not produce at the lowest point of the LAC, like the perfect competitor, the output will be less than the perfect competitor
•Monopoly can only realise normal profits in the long term
•The monopolist’s production will be less than the ideal production quantity where LAC is the minimum and has surplus capacity

Oligopoly
Can make economic profit in the long term.

Monopolistic competition
Make normal profit