Market Structures MCQ 2 (imperfect competition)

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Questions and Answers

What is a characteristic of monopsonistic competition in terms of the number of buyers?

There is only one buyer who determines the price

There are many buyers, but each buyer has significant influence over price

There are many buyers, and no individual buyer can influence price (correct)

There are a few large buyers who can influence price

What is a result of supernormal profits in a monopsonistic market?

New sellers are attracted to the market (correct)

New sellers are deterred from entering the market

The demand curve becomes more inelastic

Existing firms will reduce their prices

What is the goal of firms in a monopsonistic market?

To increase their market share

To maximize their profits (correct)

To minimize their losses

To set the lowest price in the market

What distinguishes the products supplied by different sellers in a monopsonistic market?

They are similar but not identical Signup and view all the answers

What is the result of a firm successfully building brand loyalty and differentiating itself from rivals?

A steeper demand curve Signup and view all the answers

What is the primary goal of advertising and branding strategies?

To differentiate a firm's goods and services from those of competitors Signup and view all the answers

What is the consequence of a flatter demand curve for a firm?

The firm has less power over price Signup and view all the answers

What is a characteristic of a steep demand curve?

Demand is relatively inelastic Signup and view all the answers

What is the result of a firm's failure to differentiate itself from rivals?

A flatter demand curve Signup and view all the answers

What is a benefit to consumers in a monopsonistic market?

A wider variety of goods and services Signup and view all the answers

What is a disadvantage of monopsonistic competition?

Prices are higher and output is lower than in a perfectly competitive market Signup and view all the answers

Why do firms in a monopsonistic market have an incentive to innovate and differentiate their products?

To attract more consumers and increase market share Signup and view all the answers

What is a characteristic of firms in a monopsonistic market?

They have excess capacity Signup and view all the answers

What is a result of monopsonistic competition?

Higher prices and lower output Signup and view all the answers

Does product differentiation exist in a monopolistic market?

yes Signup and view all the answers

Are their barriers to entry in an imperfect competition market?

no Signup and view all the answers

Study Notes

Monopolistic Competition

No barriers to entry/exit for suppliers, allowing free market participation.
Many buyers with no individual influence on price, ensuring a fair market.
Multiple independent sellers set their own prices, subject to the Law of Demand.
Price elasticity of demand is high due to close substitutes available in the market.
Knowledge of profits is widespread among sellers, attracting new entrants in case of supernormal profits.
Firms strive to maximize profits, driving business decisions.
Product differentiation exists, with similar but non-identical products supplied by different sellers.
Close substitutes are available, further intensifying market competition.

Demand Curve

A steep demand curve (AR) occurs when a firm has successfully built brand loyalty and differentiated itself from rivals, resulting in loyal customers being less price sensitive.
Steep demand curve means demand is relatively inelastic, giving the firm more power over price.

Factors Influencing Demand Curve

A firm's ability to build brand loyalty affects the demand curve's steepness.
Differentiation from rivals also influences the demand curve's steepness.

Flatter Demand Curve

A flatter demand curve (AR) occurs when a firm has been less successful at building brand loyalty and differentiating itself from rivals.
Flatter demand curve means demand is relatively elastic, giving the firm less power over price.

Advertising and Differentiation

Firms use various strategies to differentiate their goods/services from competitors, including:
- Branding
- Competitive advertising
- Distinctive packaging
- Product quality
- Product innovation
- Loyalty cards
- Customer service
Brand loyalty is the tendency of customers to continue buying a certain brand of a good rather than competing brands.

Advantages of Monopolistic Competition

In a monopolistically competitive market, consumers have a wide choice of firms providing goods and services, such as numerous hairdressers.
The market offers a wide variety of goods and services due to firms' incentives to innovate and differentiate themselves from others through creativity.

Disadvantages of Monopolistic Competition

Individual firms do not produce at the minimum point on the Average Cost (AC) curve in the long run, resulting in inefficiency and wastefulness of resources due to excess capacity.
Compared to a perfectly competitive market, prices are higher and output is lower in a monopolistically competitive market.

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Description

Understand the characteristics and features of monpolistic competition, a market structure where many firms compete with each other, setting their own prices and quantities.