Questions and Answers
What is imperfect competition?
A market structure in which all firms sell a similar but not identical product.
What are the characteristics of imperfect competition?
All firms are price makers, product differentiation exists, buyers have reasonable information about the product and prices, and there is freedom of entry and exit.
Why does the firm in imperfect competition not produce at the minimum point on the AC curve?
It spends money on advertising or does not produce a sufficient quantity to benefit from economies of scale.
State the assumptions underlying the theory of imperfect competition.
Signup and view all the answers
What are the advantages imperfect competition may offer to consumers?
Signup and view all the answers
Does the retail market for petrol operate under conditions of imperfect competition? State reasons for your answer.
Signup and view all the answers
What are the disadvantages of imperfect competition for consumers?
Signup and view all the answers
Study Notes
Imperfect Competition
- Defined as a market structure where firms sell similar but not identical products.
Characteristics of Imperfect Competition
- Firms are price makers, meaning they have the power to set prices rather than taking them as given.
- Product differentiation allows consumers to distinguish between similar offerings from different firms.
- Buyers have ample information about products and prices, supporting informed decision-making.
- Free entry and exit into the market facilitates competition and market adjustments.
Firm Behavior in Imperfect Competition
- Firms often do not operate at the minimum point of the Average Cost (AC) curve due to expenditures on advertising or insufficient production levels to exploit economies of scale.
Assumptions of Imperfect Competition Theory
- Numerous buyers and sellers exist within the industry, enhancing competition.
- Differentiated products are offered by various firms, leading to niche markets and varied consumer preferences.
- Entry and exit into the market are unrestricted, promoting fluid market dynamics.
- Buyers possess reasonable knowledge about product options and prices.
- Profit maximization is a common goal among firms, driving competitive strategies.
Advantages for Consumers in Imperfect Competition
- Consumer choice is increased due to the variety of products available.
- Firms can achieve normal profits, ensuring sustainability while offering competitive prices.
- Competitive pressures can lead to lower prices for consumers.
- Innovation is fostered as firms seek to differentiate their products and meet consumer demands.
- Access to information is typically better, allowing consumers to make informed choices.
Retail Market for Petrol and Imperfect Competition
- Petrol retail demonstrates imperfect competition characterized by many sellers (e.g., Shell, Statoil, Maxol).
- Products are near substitutes, leading to competitive advertising and loyalty programs that influence consumer behavior.
- Price sensitivity among consumers has increased, enabling sellers to affect demand through pricing strategies.
Disadvantages of Imperfect Competition for Consumers
- Production often does not occur at the lowest point of the AC curve due to advertising costs, resulting in higher prices.
- Excess capacity exists as firms produce below their maximum output, causing resource waste and inefficiency.
- Price in imperfect competition typically exceeds marginal cost (MC), indicating potential for increased production without raising prices.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Description
Explore the dynamics of imperfect competition, a market structure characterized by firms selling similar but differentiated products. This quiz covers key characteristics, firm behavior, and the assumptions underlying this theory. Test your understanding of how price-making and product differentiation influence market outcomes.
