Market Structures

Question 1

market structure

Answer 1

refers to the characteristics and behaviours (or competition) under which a market operates

Question 2

Market definition

Answer 2

A group of buyers and sellers who come together for the purpose of buying and selling a particular good or service.
Consumers aim to maximize satisfaction derived from consuming a good or service.

Suppliers, on the other hand, aim to maximize profits from the sale of the output they produce.

Question 3

When is market equilibrium achieved?

Answer 3

Market equilibrium is achieved when there is agreement between consumers and suppliers on the price and quantity of a good or service to be traded.

Question 4

Market demand curve

Answer 4

Shows the possible quantities of a good or service that all consumers are willing to buy at different prices

Question 5

When does market disequilibrium occur

Answer 5

Market disequilibrium occurs when the price in the market causes the quantity demanded by consumers to be unequal to the quantity supplied by producers.

This happens when the price in the market is not equal to the equilibrium price.

Question 6

Surpluses

Answer 6

Otherwise known as excess supply. Occurs when the price in the market is such that quantity supplied by producers exceeds the quantity demanded by consumers.

Question 7

Shortages excess demand

Answer 7

Occurs where the price in the market is such that the quantity supplied by producers are less than the quantity demanded by consumers

Question 8

Objectives of government interference with equilibrium prices

Answer 8

1. To promote affordability so that consumers are able to purchase essential goods and services (create a price ceiling)
2. To increase wages or the price of labour in the labour market (create a price floor)

Question 9

Government manipulation of supply and price stability

Answer 9

The government can attempt to keep market prices constant or stable by manipulating market supply

1. Purchasing and storing if supply is too large (acquiring inventories)
2. Selling stocks from storage if supply is too large (depleting inventories)

Question 10

barriers to entry

Answer 10

Restrictions that prevents other firms from entering an industry/market in the long run

Question 11

Advantages of Perfect Competition

Answer 11

• Efficient production-An efficient allocation of resources. The firm produces at
  the productive optimum (AC= MC). In chapter 13, it was shown that AC is minimised at this point. This implies that resources are being used efficiently.
• The price is low-The price charged is low compared to other types of market
  structure, which means that consumer welfare is maximised.
• No advertising-Producers do-not have to spend money or time on advertising
  or other forms of sales promotion. This is because all firms produce identical
  products and sell them at the market price. These costs are therefore saved.
• Consumer sovereignty- Consumer demand or willingness to pay for various
  products sends a signal to firms to produce certain goods. This means consumers determine what goods and services are to be produced. This is referred to as consumer sovereignty.

Question 12

Advantages of Monopoly

Answer 12

• Economies of scale-Being the sole producer, the firm is usually a large one
  and the firm can therefore enjoy economies of scale with lower cost.
• New technology- A monopoly can also afford to purchase the-latest and most
  sophisticated technology. With the latest machinery, the monopoly firm is able to
  use production inputs more efficiently.
• Research and development - The firm can undertake research-and development to stimulate innovation and invention. The monopoly may find it worthwhile to
  spend money on research and development to develop better products.

Question 13

Disadvantages of Monopoly

Answer 13

• Higher Price-A monopoly firm usually charges a higher price. As the monopoly
  firm is the only producer of the good, he charges a higher price than it would
  be ifit were determined by demand and supply. The monopolist could also
  limit the supply of the good so that consumers would be willing to pay a
  higher price to get the good.

The firm does not produce at the productive optimum point. In figure 15-6,
the monopoly firm produces QE level of output, which is below Qo level. This
means that cost of production is not minimised.

There is absence of consumer sovereignty-The consumers have to buy whatever goods and services are produced by the monopoly firm as they have no other options to choose from.

There is greater inequality of income-A monopoly can earn excessive profits by charging a high price for its goods and services. This could cause a greater inequality of income within the economy

Question 14

Ways to Control Monopoly

Answer 14

**Nationalisation- **sometimes, when a private firm gets too large or too powerful, the
government takes over, nationalises it and turns it into a state-owned entity that
does not aim to maximise profits.

Setting up a maximum price (price ceiling)-

Imposing taxes-The government can impose taxes on the monopoly to prevent it from becoming too profitable

Question 15

Barriers to Entry
examples

Answer 15

**Patents, licences and copyrights (legal barriers to entry) **

Production secrets- If the production of a good involves a secret ingredient or a secret recipe, then this would effectively prevent other firms from producing this good. In Trinidad, Angostura bitters is one product which is produced by a secret recipe and no other manufacturer can produce this good

PREDATORY PRICING- This refers to aggressive price cutting by existing firms so that no new firm will be able to compete with such low prices.

Control over raw materials- The exclusive ownership or control of a substantial amount of an essential raw material would considerably limit attempts by other firms to enter an industry. Without the availability of these raw materials, rival
firms would not be able to enter the industry.

Question 16

Market structure

Answer 16

This shows that the more the number of firms in the market, the greater is consumer welfare and production efficiency. As the number of firms in an industry increases, prices
would be lower and abnormal profits would dwindle.