Market Structure And Contsestibility

• What is a characteristic of perfect competition regarding the number of buyers and sellers?

  Many buyers and sellers
• In a perfectly competitive market, what role do sellers play in pricing?

  Sellers are price takers
• What is the entry condition for firms in a perfectly competitive market?

  Free entry to and exit from the market
• What type of knowledge do participants have in a perfectly competitive market?

  Perfect knowledge
• What type of goods are produced in a perfectly competitive market?

  Homogeneous goods
• Why do firms in a perfectly competitive market aim to maximize profits in the short run?

  To achieve supernormal profits
• What is the mobility of factors of production in a perfectly competitive market?

  Factors of production are perfectly mobile
• How is price determined in a perfectly competitive market?

  By the interaction of demand and supply
• Why are profits lower in a competitive market compared to a market with few large firms?

  Each firm has a very small market share
• What happens when firms in a competitive market make a profit?

  New firms will enter the market
• What effect does the entry of new firms have on market supply and price?

  Increases supply and lowers average price
• What type of profits do firms make in the long run in a perfectly competitive market?

  Only normal profits
• What does the short run equilibrium diagram for a perfectly competitive market show?

  Firms produce at output Q1 and earn supernormal profits
• What causes the supply curve to shift in the long run for a perfectly competitive market?

  Entry of new firms into the industry
• What happens to the price level in the long run due to increased supply?

  The price level falls
• What is the new equilibrium condition in the long run for firms in a perfectly competitive market?

  P=MC at output Q2
• What are the advantages of a perfectly competitive market?

  • Lower prices in the long run
  • Allocative efficiency (P = MC)
  • Productive efficiency (firms at bottom of AC curve)
  • Short run supernormal profits may boost dynamic efficiency
• What are the disadvantages of a perfectly competitive market?

  • Limited dynamic efficiency in the long run
  • Few or no economies of scale due to small firms
  • Assumptions rarely apply in real life
  • Imperfect competition due to branding and differentiation
• What is the distinction between allocative efficiency and productive efficiency?

  • Productive efficiency: Maximum output at lowest cost
  • Allocative efficiency: Resources allocated for maximum social welfare
  • Productive efficiency can be wasteful if consumer needs aren't met
  • Allocative efficiency maximizes consumer satisfaction
• How can productive efficiency be achieved?

  By improving management techniques or technology
• What is the relationship between productive efficiency and consumer welfare?

  It helps maximize consumer welfare
• How does allocative efficiency benefit consumers?

  By producing goods that meet consumer preferences
• What is the role of market-oriented firms in allocative efficiency?

  They increase allocative efficiency by meeting preferences
• What type of competition characterizes a monopolistically competitive market?

  Imperfect competition
• What is the profit-maximizing behavior of firms in the short run?

  Firms are short run profit maximizers
• What type of products do firms sell in a monopolistically competitive market?

  Non-homogeneous products due to branding
• What does product differentiation in monopolistic competition lead to?

  High cross elasticity of demand (XED)
• What is a key assumption of the monopolistically competitive market model?

  Large number of buyers and sellers
• How does market power vary among sellers in a monopolistically competitive market?

  Each seller has weak market power
• What is the barrier to entry in a monopolistically competitive market?

  No barriers to entry or exit
• What type of demand curve do firms in monopolistically competitive markets face?

  Downward sloping demand curve
• What does the ability to raise prices without losing all customers indicate?

  Some degree of price setting power
• What type of information do buyers and sellers have in a monopolistically competitive market?

  Imperfect information
• What is the condition for profit maximization in the short run?

  MC = MR
• What does the area P1C1AB represent in the short run?

  Supernormal profits earned by firms
• What happens in the long run due to new firms entering the market?

  Demand for existing firms' products becomes more elastic
• What is the long run equilibrium point in a monopolistically competitive market?

  P1Q1
• How can firms maintain their position in the short run?

  Differentiating their products and innovating
• What are the advantages and disadvantages of monopolistically competitive markets?

  Advantages:

  • Wide variety of choices for consumers
  • More realistic model than perfect competition
  • Short run supernormal profits may increase dynamic efficiency

  
  

  Disadvantages:

  • Allocatively inefficient (P > MC)
  • Limited dynamic efficiency in the long run
  • Excess capacity and productive inefficiency
  • X-inefficiency due to lack of cost minimization incentives
• What does allocative inefficiency mean in the context of monopolistically competitive markets?

  P is greater than MC