Market Structures Overview

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Questions and Answers

What happens to the quantity demanded for a firm's product at prices greater than the market equilibrium price?

It fluctuates based on consumer preferences.

It decreases to zero. (correct)

It increases significantly with price.

It remains constant regardless of price.

What characterizes the demand curve along segment BC?

It is perfectly inelastic.

It shows increasing elasticity.

It is perfectly elastic. (correct)

It has a finite elasticity.

How does monopolistic competition differ from perfect competition regarding advertising?

Advertising creates a perfectly elastic demand curve in monopolistic competition.

Firms in monopolistic competition do not engage in advertising.

Advertising decreases the overall market demand.

Firms can differentiate their products through advertising. (correct)

What occurs when the price is set below the market equilibrium price?

Quantity demanded may exceed quantity supplied. Signup and view all the answers

What is the effect of advertising on the demand curve in monopolistic competition?

It causes an upward shift of the demand curve. Signup and view all the answers

Which of the following best describes a perfectly elastic demand curve?

A small price change leads to an infinite change in quantity demanded. Signup and view all the answers

In a market at equilibrium, what is true about the firm's pricing strategy?

Firms must sell at or above the equilibrium price to avoid losses. Signup and view all the answers

What occurs if a firm in perfect competition attempts to increase its price?

It will lose all its customers. Signup and view all the answers

At what price does the dominant firm initially set its demand curve according to point G?

$1.3 Signup and view all the answers

How many total units does each competitive fringe firm produce when the dominant firm lowers the price to $1?

3 Signup and view all the answers

What is the relationship between price and quantity demanded at point G on the dominant firm's demand curve?

40 Signup and view all the answers

What does the marginal cost of $1 correspond to for the competitive fringe firms?

3 Signup and view all the answers

If the dominant firm sets the price to $1.3, which concept does this illustrate regarding firm behavior?

40 Signup and view all the answers

What would be a result if the price for the dominant firm drops below $1?

0 Signup and view all the answers

What quantity represents total supply from the competitive fringe firms when they produce 3 units each?

30 Signup and view all the answers

How does the price change affect the elasticity of demand for the dominant firm?

1.5 Signup and view all the answers

How do new entrepreneurs using advertising mainly impact the demand curve of existing firms?

They shift the demand curve of existing firms to a more elastic position. Signup and view all the answers

What happens to the demand curve as more competitors enter the market?

It rotates counter-clockwise, becoming more elastic. Signup and view all the answers

Why do existing firms lower their product prices when new entrants come into the market?

To maintain market share against competitors. Signup and view all the answers

How does the price elasticity of demand change for an existing firm as new competitors enter the market?

It becomes more elastic, indicating higher sensitivity to price changes. Signup and view all the answers

What is the effect of a downward shift in the demand curve on the economic profits of existing firms?

It eliminates economic profits as demand falls below costs. Signup and view all the answers

What occurs when the demand curve of an existing firm slides below the long-run average cost curve?

The firm incurs losses as prices fall below costs. Signup and view all the answers

In what way do close substitutes influence consumer behavior regarding an existing firm's product?

They increase the responsiveness to price increases. Signup and view all the answers

Which of the following statements best describes the relationship between advertising and market entry of new firms?

Advertising attracts new firms to the market by signaling profit opportunities. Signup and view all the answers

Study Notes

Other Market Structures

Firms, producers, suppliers, owners, and managers are used interchangeably.
Perfect competition is an ideal market interaction type where free entry/exit controls self-interest, promoting public interest.
Monopoly is the opposite extreme, with no free entry/exit, limited information, and inefficient resource allocation.
Real world markets often fall between these extremes, exhibiting different levels of interaction and barriers to entry/exit.
Market structure impacts the degree of self-interest exhibited by participants.

Market Structures Table

Market Structure | Number of Firms | Type of Entry and Exit | Nature of Products | Elasticity of Demand
--|---|---|---|---
Perfect Competition | Large | Free | Homogenous | Perfectly Elastic
Monopolistic Competition | Large | Free | Differentiated | Elastic
Oligopoly | Small | Restricted | Differentiated | Elastic, Inelastic
Cartel | Small or Large | No | Homogenous | Elastic, Inelastic
Monopoly | One | No | Homogenous | Elastic, Inelastic

Monopolistic Competition

Free entry and exit in the long run, but not in the short run.
Many firms exist.
Firms produce differentiated products.
Firms have some control over their prices in the short run due to their differentiated products.
Short run demand curve is relatively elastic, and becomes very elastic in the long run.
Firms strive to create a loyal customer base through advertising to differentiate their products and shift their demand curves.

Oligopoly

Few firms.
Firms have restricted entry.
Firms may produce homogenous or differentiated products.
Firms often engage in strategic behavior (e.g., agreeing on prices, dividing markets).
Example of firms in an oligopolistic market include manufacturers of cars.

Cartel

A special type of oligopoly.
Firms cooperate to act like a monopoly.
Usually few firms in the cartels and it's easy for them to agree on prices to maximize profit.
They often divide the market geographically, allowing each member to set prices and maximize profit in their assigned region

Monopolistic Competition - Short Run Equilibrium

Firms aim to maximize economic profits.
Firms choose quantity and price based on perceived demand and marginal cost.
In short-run equilibrium, output is where marginal revenue (MR) equals marginal cost (MC).
Price is set above average total cost.

Monopolistic Competition - Long Run Equilibrium

Free entry and exit drive economic profit to zero in the long run.
Firms operate where the price is equal to the average total cost.
This results in normal profit.

Advertising and Product Differentiation

Firms differentiate their products using trademarks, branding, advertising and technological advancements.
This creates a core of loyal customers and enables firms to raise prices and increase demand.

Natural Oligopoly

High economies of scale.
Only a few, large firms can efficiently serve the market, making entry difficult.
Example areas in this market are industries where large, fixed-cost capital is required to produce, transportation, electricity.

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Description

Explore the various types of market structures such as perfect competition, monopoly, and oligopoly. Understand the implications of these structures on firms, products, and consumer demand. This quiz will test your knowledge of how different market structures operate and their characteristics.