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Questions and Answers
What type of market structure is characterized by many firms representing an infinitesimal share of the market?
Perfect competition
In which market structure are firms considered price takers?
Perfect competition
Which market structure has firms facing a perfectly elastic demand curve?
Perfect competition
What is the result if any firm in a perfectly competitive market earns an economic profit?
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Which market structure features many firms selling slightly differentiated products that are not perfect substitutes?
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In monopolistic competition, can firms raise their prices without losing all customers?
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What limits profits for firms in monopolistic competition?
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Which market structure involves a few firms that know their rivals?
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What economic concept is often used to describe how firms in oligopolies might make decisions?
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Give an example of an industry where oligopolies are common.
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Study Notes
Market Structures
Market structures refer to the way different industries are classified and differentiated according to their degree of competition. Economic theory categorizes market structures into four types: perfect competition, oligopolistic markets, monopolistic markets, and monopolistic competition. These structures help us understand the nature of markets and how they function.
Perfect Competition
In a perfectly competitive market, there are many firms, each representing an infinitesimal share of the market. Firms are price takers, meaning they have no control over the price, and face a perfectly elastic demand curve. If any firm earns an economic profit, other firms can immediately enter the market, driving economic profit to zero.
Monopolistic Competition
In monopolistic competition, there are many firms, each selling slightly differentiated products that are not perfect substitutes for one another. Firms can raise their price without driving away every customer, but profits are limited because other firms can enter the market.
Oligopoly
In an oligopoly, there are a few firms, and each firm knows its rivals. Economists often use game theory to describe how oligopolists might arrive at their decisions. Oligopolies are common in industries like airlines and automobile manufacturers.
Monopoly
In a monopoly, there is only one provider of a product or service. Monopolists face the entire demand curve, and to sell an additional unit of output, they must lower their price. Monopolists often face barriers to entry, such as high fixed costs, which deter new firms from entering the market.
Market structures help us understand the competitive landscape of different industries and how they affect prices, consumer choice, and economic efficiency. Understanding market structures is crucial for businesses, policymakers, and consumers alike.
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Description
Test your knowledge on different market structures such as perfect competition, monopolistic competition, oligopoly, and monopoly. Learn how these structures impact prices, consumer choice, and economic efficiency.
