Chap 23

Question 1

Define Market Structure

Answer 1

the conditions which exist in a market including the number of firms

Question 2

Define Competitive market

Answer 2

A market with a number of firms that compete with each other

Question 3

Characteristics of a competitive market

Answer 3

The more competition there is, the more sellers and buyers there are

Each firm has a small share of the market/ small amount of the total market supply

Change in output of one firm has no effect on price

Relatively free entry & exit from the market

Question 4

Define normal profit

Answer 4

The minimum level of profit required to keep a firm in the industry in the long run

Question 5

Define Supernormal profit

Answer 5

Profit above that needed to keep a firm in the market in the long run

Question 6

Behaviour of competitive markets when demand rises (/fall)

Answer 6

When demand rises; supernormal profit
This attracts more firms into joining the market
; Supply increases and prices lower
So the supernormal profit becomes normal

Question 7

How do competitive firms promote efficiency?

Answer 7

Whichever firm responds quickly to change in demands gain a competitive advantage and earn higher profits

The threat arises because any inefficient firm that produces at a high cost will be driven out of the market.

Question 8

Define Monopoly

Answer 8

A market with a single supplier

Question 9

How do governments define a Monopoly/ Pure Monopoly/ Dominant Monopoly

Answer 9

Monopoly: 25% or more share
Dominant Monopoly: 40% share
Pure Monopoly: 100% share

Question 10

Characteristics of a monopoly

Answer 10

• The firm is the industry ( 100% share of the market )

• High barriers to entry and exit

• Price maker- Its output is the industry’s output and so changes in its supply affect the market price

Question 11

Why do monopolies arise?

Answer 11

1. May develop over time (driven out rival firms and captured the whole of the market)
2. Mergers and takeovers
3. May exist from the start ( May own everything/ granted monopolistic powers by a government, which makes it illegal for other firms to enter the market )

Question 12

Define Barrier to entry

Answer 12

anything that makes it difficult for a firm to start producing the product.

Question 13

Define Barrier to exit:

Answer 13

anything that makes it difficult for a firm to stop making the product.

Question 14

Why do monopolies continue?

Answer 14

Existence of barriers to entry and exit

Question 15

Types of barrier of entry

Answer 15

1. Legal barrier (in the form of a patent or a government act)
2. Scale of production ( Large scale= low unit cost/ New firm= higher unit costs)
3. Expensive to set up a new firm (if large capital equipment is required)
4. Creation of brand loyalty through branding and advertising
5. Monopoly’s access to resources and retail outlets.

Question 16

Types of barriers of exit

Answer 16

1. Long-term contract to provide a product- reluctant to undertake such a commitment
2. Existence of sunk costs- advertising, industry-specific equipment

Question 17

Define Sunk costs

Answer 17

Cost that cannot be recovered if the firm leaves the industry.

Question 18

Define Scale of production

Answer 18

the size of production units and the methods of production used

Question 19

The behaviour of a monopoly

Answer 19

The existence of barriers to entry, means that a monopoly can earn supernormal profits in the long run.

They can set the price, but then it has to accept the level of sales that consumers are prepared to buy at that price.

Question 20

Disadvantages of a monopoly:

Answer 20

1. Absence of competition may lead to inefficiency
2. May restrict the supply to push up prices and may produce a poor quality product, knowing that consumers cannot switch to rival products.
3. Fail to respond to changes in consumer tastes and develop new products

Question 21

Advantages of a monopoly:

Answer 21

1. Large scale production= lower unit cost and prices
2. Prevents the wasteful duplication of capital equipment
3. High profits enables it to spend on research and development
4. Need to overcome barriers to entry and break the monopoly may encourage firms outside the industry to try and develop a better product.

Question 22

Advantages of a competitive market

Answer 22

1. Promote efficiency
2. Keep prices low and quality high

Question 23

Disadvantages of a competitive market

Answer 23

1. Low-scale production = prices are not as low as possible
2. Lack of choice of types of products