(Quiz 1 ) Week 5 - Market Power

Questions and Answers

Which market structure is characterized by a single firm dominating the market?

Oligopoly

Perfect Competition

Monopolistic Competition

Monopoly (correct)

Firms in a perfectly competitive market can influence the market price.

False

What is the main goal of all firms irrespective of their market structure?

Profit maximization

In monopolistic competition, the type of product is _____ for firms.

differentiated Signup and view all the answers

Which market structure features a high ease of entry for new firms?

Perfect Competition Signup and view all the answers

Match the following market structures with their characteristics:

Perfect Competition = Many firms, identical products, high ease of entry Oligopoly = Few firms, identical or differentiated products, low ease of entry Monopoly = One firm, unique product, entry blocked Monopolistic Competition = Many firms, differentiated products, high ease of entry Signup and view all the answers

Define average revenue (AR).

Total revenue divided by the number of units sold Signup and view all the answers

In oligopoly, the number of firms is few, which can lead to price-setting behavior.

True Signup and view all the answers

What condition must be met for a firm to achieve profit maximization?

Marginal revenue equals marginal cost Signup and view all the answers

Firms in a monopolistically competitive market can earn economic profits in the long run.

False Signup and view all the answers

What happens to the demand faced by incumbent firms when new firms enter a monopolistically competitive market?

Demand decreases. Signup and view all the answers

A firm is said to have a _____ when it controls a key raw material necessary for production.

monopoly Signup and view all the answers

Match the barriers to entry with their descriptions:

Government regulations = Blocks the entry of firms into a market Control of a key raw material = One firm dominates the supply chain Network externalities = Benefits increase as more consumers use the product Economies of scale = Cost advantages for larger firms leading to monopolies Signup and view all the answers

Which of the following is NOT a reason for high barriers to entry?

High customer loyalty Signup and view all the answers

Short-run economic losses in a monopolistically competitive firm lead to firms exiting the market.

True Signup and view all the answers

What is the outcome when firms make zero economic profit?

No firms enter or exit the market. Signup and view all the answers

Study Notes

Market Structures

Economists classify industries into four main market structures: Perfect Competition, Monopolistic Competition, Oligopoly, and Monopoly.
Perfect competition is the only market structure where firms lack market power, meaning they cannot influence market prices.
Classification of an industry into a market structure depends on three characteristics:
- Number of firms in the industry
- Similarity of goods or services produced
- Ease of entry for new firms

Characteristics of Market Structures

Perfect Competition:
- Many firms
- Identical products
- High ease of entry
Monopolistic Competition:
- Many firms
- Differentiated products
- High ease of entry
Oligopoly:
- Few firms
- Identical or differentiated products
- Low ease of entry
Monopoly:
- One firm
- Unique product
- Entry is blocked

Average and Marginal Revenue

Average Revenue (AR) is calculated by dividing total revenue by the number of units sold.
Marginal Revenue (MR) represents the change in total revenue from selling an additional unit.
In perfectly competitive markets, MR equals the price of the good, while firms sell identical products.

Perfectly Competitive Market

A perfectly competitive firm cannot affect the market price and is considered a price taker.
Profit maximization occurs where Marginal Revenue (MR) equals Marginal Cost (MC).

Entry and Exit in the Long Run

Economic profits attract new firms into an industry, while losses encourage exit.
Monopolies maintain long-term economic profits due to high barriers to entry preventing new firms from entering the market.
In a monopolistically competitive market, economic profit is short-lived as low barriers allow new firms to enter, driving profits to zero in the long run.

Effects of Competition on Profits

Short-run economic profits in monopolistically competitive markets lead to increased product variety and decline in demand for incumbent firms.
Conversely, short-run economic losses lead to firm exit, reducing product variety and increasing demand for remaining firms.
Firms earning zero economic profit still obtain a positive accounting profit, making them willing to remain in the market.

Origins of Monopolies

Monopolies arise from barriers to entry that inhibit competition, with four main reasons:
- Government restrictions prevent multiple firms from entering a market.
- Control of essential raw materials by one firm.
- Significant network externalities in service or product supply.
- Large economies of scale that lead to natural monopoly.

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Description

Explore the four main market structures: perfect competition, monopolistic competition, oligopoly, and monopoly. Understand how each structure affects the market power of firms and the characteristics that define them. Test your knowledge on these economic concepts and their implications for industries.