Micro Book 5

Question 1

5 characteristics of a perfectly competitive market

Answer 1

• many buyers and sellers
• goods are homogenous
• no barriers to entry/exit
• perfect knowledge
• firms ‘price takers’ not ‘price makers’

Question 2

pure monopoly

Answer 2

when there’s one firm in the market with 100% market share

Question 3

consumer surplus

Answer 3

the difference between the maxmimum price that consumers would be willing to pay and the price they actually pay

Question 4

producer surplus

Answer 4

the difference between the minimum that sellers would be willing to accept and the price they actually receive

Question 5

arguments against monopoly (6)

Answer 5

• productively inefficient
• allocatively inefficient
• x-inefficient (no incentive to cut average cost)
• deadweight loss of economic welfare
• monopoly profits
• restrict choice for consumers and lack incentive to innovate

Question 6

arguments for monopoly (4)

Answer 6

• dynamic efficiency
• firms may reinvest profits to improve products
• can better exploit E.O.S
• natural monopolies

Question 7

features of a monopolistically competitive market

Answer 7

• large number of firms in the market
• no barriers to entry/exit in the long run
• only normal profit can be made in the long run
• goods are somewhat differentiated

Question 8

oligopoly

Answer 8

a market dominated by a few firms between whom there is conscious interdependence

Question 9

features of an oligopoly

Answer 9

• many firms in the market
• some differentiation
• barriers to entry allow firms to make economic profit
• relative price stability

Question 10

non-price competition (4)

Answer 10

• quality
• customer service
• after-sales service and warranties
• advertising/branding

Question 11

price discrimination

Answer 11

when a firm is able to charge a different price for the same good or service in different markets

Question 12

advantages of privatisation (5)

Answer 12

• revenue raised for the government (sale of assets and corporation tax)
• reduced public spending/borrowing
• promotes competition
• market forces promotes productive and allocative efficiency
• promotes enterprise culture

Question 13

disadvantages of privatisation (4)

Answer 13

• risk of abuse of monoploy power
• short termism
• selling capital assets
• risk of selling assets too cheaply

Question 14

regulatory capture

Answer 14

when regulators ‘side’ with the industry they’re meant to oversee

Question 15

customer inertia

Answer 15

when customers remain with a provider because its easier than switching (or they forgot etc.)

Question 16

working monopoly

Answer 16

a firm with more than 25% market share