Chapter 3.1 – Market Structures

Question 1

Market

Answer 1

A place where goods and services are bought and sold, where buyers and sellers interact with each other.

Question 2

Normal profit

Answer 2

Minimum profit a firm must make in order to continue business in the long run (AR = AC).

Question 3

Supernormal profit

Answer 3

Profits earned in excess of normal profits (AR > AC).

Question 4

Barriers to entry

Answer 4

Factors that prevent new firms from entering/leaving the market.

Question 5

Marginal revenue

Answer 5

Extra revenue generated from supplying an extra unit of the good.

Question 6

Herfindahl-Hirschman Index (HHI)

Answer 6

Used to measure market concentration. Calculated by squaring the market share of each firm and adding the results.

Question 7

Competitive advertising

Answer 7

Advertising that promotes the qualities/features of ones firm’s goods over those of its competitors.

Question 8

Generic advertising

Answer 8

Advertising that promotes the qualities/features of all of the output of an industry without identifying individual suppliers.

Question 9

Patent

Answer 9

Gives the inventor/developer the sole right to supply the invention for a period of time.

Question 10

Copyright

Answer 10

Gives creators of the original material the exclusive right to reproduce their original material.

Question 11

Market failure

Answer 11

Occurs when there is inefficiency in the allocation of goods and services in a free market.

Question 12

Highly concentrated market

Answer 12

When a small number of large firms account for a large percentage of the market share (>2500 HHI).

Question 13

Deregulation

Answer 13

Occurs when regulations/laws that prevent new firms from entering a market are removed e.g. electricity market.

Question 14

Price discrimination

Answer 14

Involves charging different consumers different prices for the same good or service, where the reason of price differences is not due to differences in cost of production.

Question 15

Brand loyalty

Answer 15

The tendency of some customers to continue buying a certain brand of a good rather than competing brands.

Question 16

Interdependence

Answer 16

When firms take the likely reactions of their competitors into account, especially about price.

Question 17

Price rigidity

Answer 17

Tendency in oligopolistic markets for prices not to change even if costs change, as a price rise will result in a fall of sales or provoke a price war with competitors.

Question 18

Price constancy

Answer 18

Involves leaving the price unchanged even if costs change as it could actually cost more to change the price of the good than it would to take a dent in the profits.

Question 19

Limit Pricing

Answer 19

Occurs where existing firms discourage new firms from entering by charging a lower price than they could charge, it’s potentially unprofitable and illegal.

Question 20

Brand proliferation

Answer 20

When one firm has many different variations of the same good/service.

Question 21

Market sharing

Answer 21

Where rival firms divide up sales territories and they will not trade in on another’s area, also involve agreeing on consumers (demographics) they will sell or not sell to.