Competitive and Concentrated Markets

Question 1

Market structure

Answer 1

The organisation of a market in terms of the number of firms in the market and the ways in which they behave

Question 2

Price taker

Answer 2

A firm which passively accepts the ruling market price set by market conditions outside its control

Question 3

Price maker

Answer 3

A firm possessing the power to set the price within the market

Question 4

Perfect Competition

Answer 4

A market that displays; a large number of buyers and sellers, perfect market information, the ability to buy or sell as much as is desired at the ruling market price, the inability for any individual buyer or seller to influence the market price, a homogeneous product, no barriers to entry (or exit in the long term)

Question 5

Competitive Market

Answer 5

A market in which firms aim to outdo their rivals, but it does not necessarily meet all the conditions of perfect supply

Question 6

Concentrated market

Answer 6

A market containing very few firms, in the extreme only one firm

Question 7

Pure monopoly

Answer 7

When there is only one firm in the market

Question 8

Monopoly Power

Answer 8

The power of a firm to act as a price maker rather than as a price taker

Question 9

Imperfect competition

Answer 9

Any market structure lying between the extremes of perfect competition and pure monopoly

Question 10

Profit maximisation

Answer 10

Occurs when a firm’s total sales revenue is furthest above total costs of production

Question 11

Sales maximisation

Answer 11

Occurs when sales revenue is maximised

Question 12

Market share maximisation

Answer 12

Occurs when a firm maximises its percentage share of the market in which it sales its product

Question 13

Entry barrier

Answer 13

Makes it difficult or impossible for new firms to enter a market

Question 14

Exit barrier

Answer 14

Makes it difficult or impossible for firms to leave a market

Question 15

Consumer sovereignty

Answer 15

Through exercising their spending power, consumers collectively determine what is produced in a market. Consumer sovereignty is strongest in a perfectly competitive market

Question 16

Producer sovereignty

Answer 16

Where producers or firms in a market determine what is produced and what prices are charged

Question 17

Natural monopoly

Answer 17

• When a country or firm has complete control of a natural resource
• When there is only room in market for one firm benefiting from economies of scale to the full

Question 18

Patent

Answer 18

A strategic or man made Barrier to market entry caused by government legislation protecting the right of a firm to be the sole producer of a patented good, unless the firm grants royalties for other firms to produce the good

Question 19

Natural barrier to entry

Answer 19

A barrier to market entry which is not man made

Question 20

Artificial barrier to entry

Answer 20

A barrier to market entry which is man made

Question 21

Informative advertising

Answer 21

Provides consumers and producers with useful information about goods or services

Question 22

Persuasive advertising

Answer 22

Attempts to persuade potential customers that a good or service possesses desirable characteristics that make it worth buying

Question 23

Saturation advertising

Answer 23

Through flooding the market with information and persuasion about a firm’s product, this functions as a man made barrier to market entry by making it difficult for smaller firms to compete

Question 24

Product differentiation

Answer 24

Making a product different from other products through product design, the method of producing the product, or through its functionality

Question 25

Quantity Setter

Answer 25

A firm chooses the quantity of a good to sell, rather than its price. In a monopoly, the market demand curve then dictates the maximum price that can be charged if the firm is to successfully sell its chosen quantity

Question 26

Concentration Ratio

Answer 26

A ratio which indicates the total market share of a number of leading firms in a market, or the output of these firms as a percentage of total market output

Question 27

Oligopoly

Answer 27

A market dominated by a few firms

Question 28

Resource misallocation

Answer 28

When resources are allocated in a way which does not maximise economic welfare

Question 29

Collusion

Answer 29

Co-operation between firms, for example to fix price. Some forms of collusion might be in the public interest, for example joint research and labour training schemes

Question 30

Invention

Answer 30

Creates new ideas for product or processes

Question 31

Innovation

Answer 31

Converts the results of invention into marketable products or services

Question 32

Price Competition

Answer 32

Reducing the price of a good or service to gain sales by making it more attractive for consumers

Question 33

Limit pricing

Answer 33

Reducing the price of a good to just above the average cost to deter the entry of new firms into the market. Prices are set at levels which are likely to make it unprofitable for potential entrants who might consider coming into the market

Question 34

Predatory pricing

Answer 34

Temporarily reducing the price of a good to below average cost to drive smaller firms or new market entrants out of the market