3.4

• Characteristics of perfect competition

  • Profit Maximisers
  • Price Takers
  • Perfect Information
  • No barriers to entry
  • Homogenus goods
• Characteristics of monopolistically competitive market

  • Many buyers and sellers
  • goods sold are differentiated
  • Price Setters
  • Profit Maximisers
  • Low barriers to entry or exit
• Characteristics of an oligopoly

  • High barriers to entry
  • High concentration ratio
  • Interdependence of firms
  • Price Setters
  • Profit maximisers
  • Product differentiation
• What are factors which make collusion more likely?

  • When there is a few firms eg. duoolipy
  • Same firms which have been there for a while
  • If there is a high profit due to collusion
  • If penalty of collusion is low
• What is the difference between overt and tacit collusion


  O- any form of direct contact between firms

  T- Eg. following market leader in raising prices
• List 3 diffrent pricing strategies

  1. Limit Pricing
  2. Predatory Pricing
  3. Price Wars
• Explain Price wars

  When price cutting leads to retaliation and repeats.
• Explain predatory pricing

  Cutting prices below average and driving out any firms which can't afford it out of the market. Prices are then lifted again, almost always illegal.
• Explain limit pricing

  Cutting prices so that it deters new entrants from joining the market, and may act as a disincentive for some firms in the market to expand. This may or may not be illegal depending on the case
• List non price strategies

  Advertising and Branding

  Design and Quality

  Reliability

  Service

  Loyalty cards and free gifts
• List characteristics of monopoly

  Price setters

  Profit Maximisers

  Imperfect information

  One firm

  Many high barriers to entry and exit

  Unique goods
• Characteristics of monopsony

  Sole buyers

  Profit maxamisers
• List the characteristics of contestable markets

  Low barriers to entry and exit

  Low sunk costs

  Low levels of Supernormal profit

  Low levels of collusion
• Define Sunk costs

  Unrecoverable costs
• Explain the different types of barriers to entry and exit

  Artificial barriers eg. limit pricing

  Natural pricing eg. economies of scale

  Advertising

  Cost of closure

  Specialised machinery

  Legal barriers
• Explain allocative efficiency and where its located

  How efficiently are resources allocated

  AR = MC or when Price = MC
• Explain productive efficiency and where its located

  Is the product being produced as cheaply as possible, at the lowest point of AC
• Explain dynamic efficiency and where its located


  When resources are used efficiently overtime eg. decrease in AC