imperfect competition, economic surplus, social welfare

Question 1

imperfect competition

Answer 1

firms have different levels of market power, opposite to perfect competition where firms sell identical goods and are all price takers

Question 2

market power

Answer 2

is a continuum from perfect competition to monopolistic competition to oligopoly to monopoly

Question 3

monopoly

Answer 3

• market with only one seller (demand is market demand)
• absolute market power (price maker)
• eg Transport NSW

Question 4

oligopoly

Answer 4

• market with a few large sellers
• eg Coca Cola and Pepsi

Question 5

monopolistic competition

Answer 5

• market with many small businesses competing each selling differentiated products
• differentiation allows some market power
• eg fast food franchises

Question 6

elasticity in imperfect competition

Answer 6

oligopoly/monopoly = demand inelastic
perfect/monopolistic = demand elastic

Question 7

marginal revenue based on market power

Answer 7

PC - MR is equilibrium price (only choose how much to sell)
monopolists - not just equilibrium as firms (can choose how much to sell and charge)
NOTE - cost of production is the same

Question 8

monopolists expanding production

Answer 8

extra supply and lower costs = gaining revenue on marginal unit (extra) but losing revenue on the infra marginal units (existing)

Question 9

welfare economics

Answer 9

understanding how market activity affects stakeholders by measuring social costs and benefits

Question 10

economic surplus

Answer 10

answers who makes what, who gets what, how much is made based on welfare

Question 11

economic surplus equation

Answer 11

• marginal benefits - marginal costs to society
• consumer + producer surplus

Question 12

consumer surplus

Answer 12

• consumer’s willingness to pay minus what they actually end up paying
• area below the demand curve and above the price

Question 13

producer surplus

Answer 13

• price a firm receives minus its marginal cost of production
• area above the supply curve and below the price

Question 14

economic efficiency

Answer 14

amount that produces largest possible economic surplus (marginal benefit to society = marginal cost to society)

Question 15

who makes what in PC

Answer 15

goods/services are produced by who can do so at the lowest opportunity cost

Question 16

who gets what in PC

Answer 16

goods/services allocated to entity who gets greatest marginal benefit from it, measured by willingness to pay for it

Question 17

how much is made (MB = MC)

Answer 17

• selling less = unrealised gains from trade
• selling more = total surplus is reduced

Question 18

to be economically efficient

Answer 18

no externalities and full information

Question 19

externalities

Answer 19

• costs or benefits imposed on bystanders whose interests are not taken into account
• negative and positive
• government intervention is generally the remedy

Question 20

full information

Answer 20

private information exists when one party of an exchange has information that the other does not, and can undermine efficiency of a market