Perfect competition and monopoly

Question 1

Define perfect competition.

Answer 1

Market structure with many firms, free entry, identical products, and price-taking behavior.

Question 2

Define short run under perfect competition.

Answer 2

Insufficient time for new firms to enter the industry.

Question 3

Define long run under perfect competition.

Answer 3

Enough time for new firms to enter the industry.

Question 4

What is rate of profit in perfect competition?

Answer 4

Total profit as a proportion of the capital employed (TΠ/K).

Question 5

Define increasing-cost industry.

Answer 5

Industry where average costs increase as the industry expands.

Question 6

Define constant-cost industry.

Answer 6

Industry where average costs stay constant as the industry expands.

Question 7

Assumptions under perfect competition.

Answer 7

Firms are price takers, complete freedom of entry, identical products, perfect knowledge.

Question 8

Define monopolistic competition.

Answer 8

Many firms, freedom of entry, differentiated products, some price control.

Question 9

Define oligopoly.

Answer 9

Few firms, potential barriers to entry, some degree of market power.

Question 10

Define monopoly.

Answer 10

Single firm, significant barriers to entry, unique product, considerable price control.

Question 11

Define barrier to entry.

Answer 11

Obstacles that prevent new competitors from easily entering an industry.

Question 12

Define natural monopoly.

Answer 12

A single firm can supply the entire market at a lower cost than multiple firms.

Question 13

Define switching costs.

Answer 13

Costs incurred by consumers to switch suppliers.

Question 14

Define network externalities.

Answer 14

The value to a consumer increases as more consumers use the product.

Question 15

Define limit pricing.

Answer 15

Setting prices low to deter new competition.

Question 16

Characteristics of a monopoly.

Answer 16

Barriers to entry, unique product, control over price.

Question 17

How do monopolists determine equilibrium price and output?

Answer 17

By setting outputs where marginal cost equals marginal revenue.

Question 18

Profit possibilities for a monopolist.

Answer 18

Supernormal profit, normal profit, or loss.

Question 19

Efficiency of monopolists.

Answer 19

They may not be productively or allocatively efficient due to lack of competition.

Question 20

Define perfectly contestable market.

Answer 20

Free and costless entry and exit, the incumbent cannot respond immediately to entry.

Question 21

Define hit and run.

Answer 21

Strategy to enter the market, make short-term profits, and exit before incumbents react.

Question 22

Price and profit in contestable markets.

Answer 22

Competition can enter and make profits, keeping prices down, monopolies make normal profit.

Question 23

Actual vs. potential competition.

Answer 23

Actual competition is present, potential competition is the threat of new entrants.

Question 24

Importance of costless exit in contestable markets.

Answer 24

Encourages competitive pressure, allows for easy exit without significant losses.

Question 25

Compare perfect competition and monopoly on price/output.

Answer 25

Perfect competition: P=MC, higher output. Monopoly: P>MC, lower output.

Question 26

Advantages of monopoly for the public.

Answer 26

Potential for lower prices due to economies of scale, efficiency incentives, innovation.

Question 27

Disadvantages of monopoly for the public.

Answer 27

Higher prices, lower output than perfect competition, less product variety.

Question 28

Benefits of perfect competition for society.

Answer 28

Efficient pricing, firms respond quickly to consumer changes, productive efficiency.

Question 29

Disadvantages of perfect competition for society.

Answer 29

Assumes no economies of scale, potential for transient inefficiencies.

Question 30

Contestable markets and public interest.

Answer 30

Low costs and prices due to potential competition; in practice, may allow for supernormal profits.

Question 31

Define imperfect competition.

Answer 31

Collective name for monopolistic competition and oligopoly.

Question 32

Factors determining firm’s market power.

Answer 32

Number of firms, barriers to entry, product differentiation.

Question 33

Strengths of the theory of contestable markets.

Answer 33

Provides a nuanced view by considering potential competition, not just existing firms.