Market Structure and Perfect Competition

Question 1

5 assumptions of perfect competition

Answer 1

Infinite number of buyers and sellers
Homogenous goods
No barriers to entry or exit
Perfect information is available
Firms are profit maximisers and profit takers

Question 2

Why the AR curve is perfectly elastic in perfect competition

Answer 2

Infinite number of substitute goods as all firms sell the same thing so there is no brand loyalty

Question 3

What happens to a firms profit in the long run in perfect competition

Answer 3

Supernormal profits attract new firms into the market
Supply increases so price decreases which uses up all the supernormal profit

Question 4

Closest example of a perfectly competitive market

Answer 4

Agriculture (wheat etc.)
Foreign Exchange (e.g. USD - always the same good)

Question 5

Perfectly Competitive market

Answer 5

Infinite firms
Homogenous goods and services
No barriers to entry
Supernormal profit in SR
No supernormal profit in LR
Firms are price takers
Perfect knowledge
Profit maximising
No non-price competition (R+D)
Efficiency in LR
No innovation
Perfectly elastic AR curve

Question 6

Monopolistic Competition market

Answer 6

Many small firms
Slightly differentiated goods and services
Few barriers to entry
Supernormal profit in SR
No supernormal profit in LR
Firms are price setters
Imperfect knowledge
Profit maximising
Non-price competition (R+D)
No efficiency in LR
No innovation
Elastic AR curve

Question 7

Oligopoly

Answer 7

A few large firms
Differentiated goods and services
High barriers to entry
Supernormal profit in SR
Supernormal profit in LR
Firms are price setters
Imperfect knowledge
Profit maximising
Non-price competition (R+D)
No efficiency in LR
Innovation
Inelastic AR curve

Question 8

Monopoly

Answer 8

1 firm
Unique goods and services
Very high barriers to entry
Supernormal profit in SR
No supernormal profit in LR
Firms are price setters
Imperfect knowledge
Profit maximising
Non-price competition (R+D) (they have the ability to but no incentive)
No efficiency in LR
No innovation
Very elastic AR curve

Question 9

Examples of Perfectly Competitive market

Answer 9

Currency Exchange

Question 10

Examples of Monopolistic Competition market

Answer 10

Pimlico Plumbers, Cornershops

Question 11

Examples of Oligopoly

Answer 11

Coca-cola, Apple

Question 12

Examples of Monopoly

Answer 12

London Underground, NHS

Question 13

Market Share

Answer 13

The amount of a market supplied by a firm

Question 14

Concentration Ratio

Answer 14

The market share of the largest firms combined in the industry

Question 15

Markets with highest 3 firm concentration ratio

Answer 15

Video on Demand: 80%
Broadband: 74%
Smartphone Manufacturers: 71.6%