Chapter 8

Question 1

price maker and its elasticity

Answer 1

a business that has control over its prices.

demand is inelastic.

Question 2

price taker and its elasticity

Answer 2

a business that doesn’t have control over its prices.

demand is elastic.

Question 3

4 types of market structures

Answer 3

1. monopoly
2. oligopoly
3. monopolistic competition
4. perfect competition

Question 4

4 features of a monopoly

Answer 4

1. high barriers to entry
2. demand is inelastic
3. price maker
4. no substitutes

Question 5

4 features of an oligopoly

Answer 5

1. few barriers to entry
2. demand is inelastic
3. price maker
4. few substitutes

Question 6

4 features of a monopolistic competition

Answer 6

1. no barriers to entry
2. demand is elastic
3. price taker
4. few substitutes

Question 7

4 features of a perfect competition

Answer 7

1. no barriers to entry
2. demand is elastic
3. price taker
4. many substitutes

Question 8

relationship between substitutes and pricing power

Answer 8

more substitutes = price taker - elastic demand

less substitutes = price maker - inelastic demand

Question 9

product differentiation

Answer 9

method used to make the original product stand out from its substitutes.

Question 10

relationship between product differentiation and pricing power

Answer 10

more product differentiation = demand increases for original product = price maker

less product differentiation = demand increases for substitute = price taker

Question 11

3 characteristics of market structure

Answer 11

1. number of substitutes
2. number of competitors
3. barriers to entry

Question 12

relationship between competition and pricing power

Answer 12

more competition - higher substitutes = price taker

less competition - low substitutes = price maker

Question 13

2 barriers to entry

Answer 13

1. legal barriers
2. economic barriers

Question 14

2 legal barriers

Answer 14

1. patents
2. copyrights

Question 15

economic barriers

Answer 15

high economies of scale help keep competition out

Question 16

why do businesses compete?

Answer 16

this is a business’s attempt to increase profits and gain the market power of a monopoly

Question 17

5 things businesses do to increase profits and gain the market power of a monopoly

Answer 17

1. reduce costs
2. improve product quality
3. advertise
4. eliminate competition
5. build barriers to entry

Question 18

what does reducing costs do to a business?

Answer 18

increase profits

Question 19

what does advertising do to a business?

Answer 19

makes the demand more inelastic

Question 20

what does improving product quality do to a business?

Answer 20

increases pricing power

makes the demand more inelastic

Question 21

what does eliminating competition do to a business?

Answer 21

increases pricing power

Question 22

what does building barriers to entry do to a business?

Answer 22

increases profits