Micro 14 - Objectives of Firms, Perfect Competition and Monopoly

Question 1

Spectrum of competition between different market types - most to least competitive, least to most concentrated.

Answer 1

1. Perfect competition.
2. Monopolistic competition.
3. Oligopoly.
4. Monopoly.

Question 2

How to distinguish between different market structures

Answer 2

1. No. of firms operating in that industry.
2. Degree of product differentiation.
3. Ease of entry.

Question 3

How is the competitiveness of an industry measured?

Answer 3

> Concentration ratios

Question 4

Concentration ratios

Answer 4

> Concentration ratios measure the percentage of the market share that is held by the largest firms in an industry.
E.g. A C2 concentration ratio calculated the market share of the 2 largest firms, C3 of the largest 3 firms and so on.

Question 5

How can market share be measured?

Answer 5

> Market share can be measured by:

1. The % of sales revenue.
2. % of total output in units.
3. % of total labour employed.

Question 6

The higher the concentration ratio…

Answer 6

the less competitive the market.

Question 7

Legal Monopoly (UK) - definition

Answer 7

> A firm which has 25% or more of the market share.

Question 8

Dominant Monopoly - definition

Answer 8

> A firm which has 40% or more of the market share.

Question 9

Pure/Perfect Monopoly - definition

Answer 9

> A firm which is the only producer in a market with 100% market share.

Question 10

Natural Monopoly - definition

Answer 10

> The firm which produces a good or service in the most efficient way in an industry.

Question 11

Assumptions of markets

Answer 11

> In a perfectly competitive market it is assumed that the marginal cost curve is the supply curve for the firm.
This isn’t usually the case for a monopoly.
In both monopolies and perfect competition, the AR curve is the demand curve.

Question 12

Monopoly Key Characteristics - No. of firms

Answer 12

> One seller dominating the market - pure monopoly, monopoly power.

Question 13

Monopoly Key Characteristics - barriers to entry

Answer 13

> Difficult barriers of entry/exit.

Question 14

Monopoly Key Characteristics - information

Answer 14

> Imperfect information.

Question 15

Monopoly Key Characteristics - product homogeneity/differentiation

Answer 15

> Higher

Question 16

Monopoly Key Characteristics - price-maker or taker?

Answer 16

> Price-maker

Question 17

Monopoly Key Characteristics - extra

Answer 17

>Not AE: charging a price greater than MC, exploiting consumers.
>Not PE.
>Statically inefficient.
>High profit.
>Is dynamically efficient.

Question 18

Monopoly power

Answer 18

> A firm is said to have ‘monopoly power’ if it dominated an industry and as a consequence is able to have a significant influence over the price of goods and total level of output in the industry.

Question 19

Perfect Competition Key Characteristics - no. of firms

Answer 19

> Many buyers and sellers (infinite).

Question 20

Perfect Competition Key Characteristics - barriers to entry

Answer 20

> No barriers to entry/exit.

Question 21

Perfect Competition Key Characteristics - information

Answer 21

> Perfect information

Question 22

Perfect Competition Key Characteristics - product homogeneity/differentiation

Answer 22

> Homogenous goods.

Question 23

Perfect Competition Key Characteristics - price-taker or maker

Answer 23

> Price-taker as all goods are the same so they can be undercut.

Question 24

Perfect Competition Key Characteristics - extra

Answer 24

> In the short-run: supernormal profit. As the supernormal profits cause more firms to enter, supply shifts right until price is lowered.
Long-run: normal profit.

Question 25

Q. With an appropriate diagram, explain why a firm in perfect competition will be unable to make supernormal profit in the long run. 9 marks.

Answer 25

1. Supernormal profit. 2. More firms enter. 3. Supply curve shifts right. 4. Price lowers as they are price-takers. 5. Continues until no more supernormal profits are made and they are reduced to normal profits in the long-run.

Question 26

Monopolies and market failure

Answer 26

>Monopolies that aim to maximise profits can be said to lead to market failure.

Question 27

Natural monopolies

Answer 27

>Natural monopolies occur when there are very high fixed costs or start-up costs, so that AC and MC consistently fall indefinitely with every increase in output. >These industries (e.g. railways, roads, infrastructure) benefit from very significant economies of scale. >It is argued that such industries should run as monopolies as this is the most efficient way of producing the good or service.

Question 28

Monopoly power -definition

Answer 28

>The ability of a firm to be a 'price-maker' | and influence the price of a particular good in the market.