Section 1.1 - Competitive markets: Demand and Supply

Question 1

Price Mechanism

Answer 1

The process by which prices rise or fall as a result of changes in demand or supply.

Question 2

Perfect Competition

Answer 2

A market with…
Many firms
Identical products
Low barriers to entry
Perfectly elastic demand
0 long-run profits
Socially efficient
Marginal cost pricing
Price-takers

Question 3

Monopolistic Competition

Answer 3

A market with…
Many firms
Differentiated products
Low barriers to entry
Can set at any price
Can NOT achieve long-run profits
Not socially efficient
Price>MC
Non-price competition like advertising

Question 4

Oligopolistic Competition

Answer 4

A market with…
Several firms
Standard/slightly different products
High barriers to entry
Prices tend to be sticky*
Game theory and payoff matrix
Can achieve long-run profits
Not socially efficient
Price>MC
Non-price competition like advertising

*rivals match price decreases but not increases, prices don’t change very fluidly

Question 5

Monopoly

Answer 5

A market with…
1 firm
Unique product
Can set any price
Can achieve long-run profits
High barriers to entry
Not socially efficient
Price>MC