Market structure stuff to note

Question 1

Characteristics of Perfect Competition

Answer 1

No barriers to entry
No legal, financial, marketing etc barriers
Perfect Knowledge
No patents, no unique technology, transparent pricing
Homogenous Product
Every product is identical
Many buyers and sellers who are price takers (see next slide)

Question 2

Is perfect competition realistic?

Answer 2

very few markets meet the standards of perfect competition
However it useful as an ideal against which real life markets can be assessed.
If a market is very far away from the model of perfect competition, the government may wish to intervene to improve the market.
ery few markets meet the standards of perfect competition
However it useful as an ideal against which real life markets can be assessed.
If a market is very far away from the model of perfect competition, the government may wish to intervene to improve the market.

Question 3

Short run to long run analysis

Answer 3

The firm is making a loss as at the original profit maximising output Q = AR<AC
Firms start to become bankrupt leading market supply to shift from S to S1
This changes the market price from P to P1
This increase the demand for a firm from D=AR=MR to D1=AR1=MR1
At the new profit maximising point (MR1 = MC aka Q1) AR = AC so the firm is now making normal profit and surviving

Question 4

SNP Equilibrium

Answer 4

Whilst a firm can temporarily make supernormal profit due to low barriers entry, perfect knowledge and high numbers of buyers and sellers other firms will enter the market to take advantage of these high profits
This increases the market supply and hence reduces prices
This means the supernormal profit is competed away

Question 5

Why should the government help small businesses?

Answer 5

mall and Medium-sized Enterprises (SMEs) provide 60% of jobs in the UK and 50% of GDP
These businesses often grow to become even more successful, boosting UK exports and providing tax revenue for the government
On a microeconomic level, they can also challenge larger firms, leading to lower prices and more choice for consumers

Question 6

How can the government help small businesses?

Answer 6

Ensure firms have access to finance (made worse by the credit crunch)
Provide support and advice on how to run a business
Provide training for workers
Offer lower tax rates for small businesses

Question 7

Are there any problems with the government helping small businesses?

Answer 7

Not all businesses want to grow and government support may encourage them to stay small
In a globalised era it may make sense to back established ‘national champions’
The government could be accused of ‘picking winners’ and the investment may not work
With such a large budget deficit, the money could be more effectively used elsewhere (opportunity cost)