Unit 2: Firms, Competition, and the Market

Question 1

Non-price competition:

Answer 1

Firms engage in competition that involves changing anything but price.

Question 2

Perfect competition:

Answer 2

Characterized by many producers and a uniform product

Question 3

Monopolistic competition:

Answer 3

Products can be differentiated and there are a substantial number of firms operating in the market.

Question 4

Product differentiation:

Answer 4

When suppliers successfully differentiate their product from competitors, it leads to brand loyalty from consumers. Consumers pay more to satisfy that product. Due to brand loyalty successful firms in a monopolistically competitive market do have some price control

Question 5

Oligopoly:

Answer 5

A market structure characterized by a few large firms, selling an identical or differentiated product, each with some to substantial control over price

Question 6

Collusion:

Answer 6

An illegal agreement among competing firms to set prices, limit output, divide the market, or exclude other competitors

Question 7

Monopoly:

Answer 7

A market structure in which one firm has complete control over supply, allowing it to set a profit-maximizing price

Question 8

Natural monopoly:

Answer 8

Afield with high fixed costs (such as public utilities) in which greater efficiencies result when one firm supplies the product or provides the service

Question 9

Deregulation:

Answer 9

The opening of a market to more competition by eliminating government regulations originally put in place to limit competition

Question 10

Privatization:

Answer 10

The sale of public assets in a government enterprise to private firms

Question 11

Ultimate purpose of economic activity

Answer 11

To meet consumer needs

Question 12

Market:

Answer 12

Group of buyers and sellers of particular goods or services.

Question 13

Price is the most ___ areas of competition

Answer 13

Obvious

Question 13

Main mechanism that holds firms accountable to consumers, managers, shareholders

Answer 13

Competition from other firms

Question 14

EX. of Non-price competition

Answer 14

Firms competing on prodct quality. Best delivery service, warranty, style or location as well.

Question 15

5 factors to determine market structure

Answer 15

5 Factors to determine market structure:
1) Number (and size) of firms in market
2) Degree to which competitors’ products are similar
3) Firm’s control over price
4) Ease with which firms can enter or leave the market
5) Amount of non-price competition

Question 16

4 Basic market structures:

Answer 16

Perfect competition, Monopolistic competition, Oligopoly, monopoly.

Question 17

Market structure spectrum

Answer 17

• Perfect competition and monopoly represent opposite poles of market spectrum
• Monopolistic and oligopoly are benchmarks on the spectrum

Question 18

Perfect competition:

Answer 18

Characterized by many producers and a uniform product. (Ex. Suppliers of agricultural goods).

Question 19

Perfect competition market characteristics:

Answer 19

1) Many buyers/sellers in the market. Individual firms have no control over total market supply.
2) All firms sell standardized products. (Long country road with every farmer selling same produce)
3) Producers must accept market equilibrium prices for products. They can sell as much or as little as they choose without changing price. Suppliers must take the market price, because they have no impact on total supply
4) Relatively easy to enter/exit market. Start-up costs or leaving costs aren’t too great to prevent firms from doing either.
5) All firms sell same product, can sell as little or as much as wanted at market price, there’s little non-price competition among them.

Question 20

Firm’s success depends on how well firm handles its costs. Decision-making depends on reducing cost per unit produced.

Answer 20

Firm has no control over quantity sold, profitability depends entirely on making efficient use of economy’s scarce resources. Most efficient firms will be rewarded with profit. Achieving low costs can also work against a firm, attracting more suppliers, which will increase price, driving down market prices and profits down.

Question 21

Perfectly competitive market doesn’t exist:

Answer 21

there’s always some start-up costs or use of non-price competition. Closest to perfect competitors are wheat farmers. They produce an identical product, have no influence over market price, and don’t participate in non-price competition. Wheat farmers need a large capital to enter the business, so there is a barrier to market entry

Question 22

Monopolistic competition:

Answer 22

Products can be differentiated and there are a substantial number of firms operating in the market.

Question 23

Major characteristics of monopolistic competition:

Answer 23

1) Substantial number of firms compete in market
2) Firms sell similar not identical products
3) Individual firms are large enough to influence total supply, and so have some influence over the price of product
4) Relatively easy for a firm to start up
5) Non-price competition is significant

Question 24

EX. of monopolistic competition

Answer 24

Most prevalent in service/retail sectors of Canadian economy. Example: Pizza parlours compete with other ones.

Question 25

Monopolistic competitive markets seek to

Answer 25

Distinguish product or service from competitors in some desirable way.

Question 26

Competition might be a price war if each store attempts to increase its market share by offering lower prices and special deals.

Answer 26

xample: Pizza stores may offer unique services. Are relatively easy to enter and leave the market. Economies of scale and capital requirements are limited. Firms must distinguish between theirs and competitors, this creates financial barriers. Monopolistic competitive markets seek to distinguish product or service from competitors in some desirable way.

Question 27

Oligopoloy market characteristics

Answer 27

1) Dominated by few, large firms
2) Competing firms may produce products similar
3) Firm’s freedom to set prices varies from slight to substantial.
4) Significant financial and other barriers to entry
5) Non-price competition can be intense

Question 27

Consumers become frustrated as competition plays out in an oligopoly.

Answer 27

Frustrated because oligopolies lower/raise prices at their will.

Question 28

Monopoly market characteristics

Answer 28

1) It’s a market completely dominated by a single firm. 2) This firm has complete control over total supply.
3) Firm produces unique product with no close substitutes
4) Firm is a price maker; by changing supply it decides the price to maximize profits
5) Major entry barriers prevent other firms from entering the market
It has no direct competitors, it doesn’t engage in non-price competition

Question 29

Firm may establish a monopoly by gaining legal control of its product;

Answer 29

and the exclusive right to benefit from its sale. Copyright law gives writers control over their work, and patent law gives protection to inventors by giving them the sole right to benefit from the sales of a product, for a time period. Monopolists are better able to produce large quantities of output. They have financial resources to assume the costs/risks of capital intensive production, and can achieve efficiencies that come from economies of scale.