section 4 definitions

Question 1

What is perfect competition?

Answer 1

A market with many buyers and sellers selling homogenous goods with perfect information and freedom of entry and exit

This type of market structure ensures that no single buyer or seller can influence the market price.

Question 2

Define monopoly.

Answer 2

A single seller in the market

Monopolies can lead to higher prices and reduced output compared to competitive markets.

Question 3

What is dynamic efficiency?

Answer 3

Efficiency in the long run; concerned with new technology and increases in productivity which causes efficiency to increase over a period of time

This concept emphasizes the importance of innovation and technological advancements.

Question 4

What does X-inefficiency refer to?

Answer 4

When firms produce at a cost above the AC curve

This inefficiency can occur in monopolistic markets where firms lack competitive pressure.

Question 5

Define natural monopoly.

Answer 5

Where economies of scale are so large that not even a single producer is able to fully exploit them; it is more efficient for there to be a monopoly than many sellers

Examples include utilities like water and electricity.

Question 6

What is price discrimination?

Answer 6

When a monopolist charges different groups of consumers different prices for the same good or service

This practice can maximize profits by capturing consumer surplus.

Question 7

Define monopolistic competition.

Answer 7

Where there are a large number of buyers and sellers who are relatively small and act independently, selling non-homogenous goods

This market structure allows for product differentiation.

Question 8

What is an oligopoly?

Answer 8

Where a few firms dominate the market and have the majority of market share, they act interdependently

Oligopolies can lead to collusion and price-setting behaviors.

Question 9

Define non-price competition.

Answer 9

When firms compete on factors other than price, for example customer service or quality; they aim to increase the loyalty to the brand which makes demand more inelastic

This strategy can help firms maintain market share without engaging in price wars.

Question 10

What does interdependent mean in the context of market structures?

Answer 10

The actions of one firm directly affects another firm

This is particularly relevant in oligopolistic markets.

Question 11

Define collusion.

Answer 11

Occurs when firms agree to work together, for example by setting a price or fixing the quantity they produce

Collusion can lead to higher prices and reduced competition.

Question 12

What is overt collusion?

Answer 12

Collusion where firms come to a formal agreement, for example a cartel

This type of collusion is illegal in many jurisdictions.

Question 13

Define tacit collusion.

Answer 13

Collusion where there is no formal agreement, such as price leadership

Firms may implicitly agree to avoid competitive pricing.

Question 14

What is a non-collusive oligopoly?

Answer 14

When firms in an oligopoly compete against each other, rather than making agreements to reduce competition

This can lead to competitive pricing and innovation.

Question 15

Define concentration ratio.

Answer 15

The combined market share of the few top firms in a market

A higher concentration ratio indicates less competition.

Question 16

What is game theory?

Answer 16

Used to predict the outcome of a decision made by one firm, which has incomplete information about the other firm

This analytical tool helps firms strategize in competitive environments.

Question 17

Define contestable market.

Answer 17

When there is the threat of new entrants into the market, forcing firms to be efficient

This concept emphasizes the importance of potential competition.

Question 18

What is a perfectly contestable market?

Answer 18

A market with no barriers to entry, where a new firm can easily enter and compete against incumbent firms completely equally

This ideal scenario promotes efficiency and consumer welfare.