Basics of Market Structures
What are the basic questions economists ask to determine a market structure?
To determine market structure, economists ask how many buyers and suppliers there are, how large they are, whether they have influence over price, the amount of competition, the nature of the product, and how easy it is for new firms to enter the market.
Why is there no need for brand names or advertising in a perfectly competitive market?
There is no need for advertising or brand names because buyers and sellers deal in identical products with no difference in quality.
How is a monopoly defined as a market structure?
A monopoly is a market structure with only one seller of a particular product.
Name the five most common types of market failures.
The most common market failures involve cases of inadequate competition, inadequate information, resource immobility, externalities, and public goods.
What is the definition of "market structure
Market structure refers to the nature and degree of competition among firms operating in the same industry.
What is "product differentiation" and how is it utilized in monopolistic competition?
Product differentiation involves real or imagined differences between competing products in the same industry, such as design, location, or manner of payment. Monopolistic competitors use these differences to attract more customers and gain a small market share.
Why is the behavior of firms in an oligopoly described as interdependent?
Because oligopolists are so large, whenever one firm acts (such as changing a price), other firms usually follow and match the change within a very short time.
What is "resource immobility" and how does it affect market efficiency?
Resource immobility means that land, capital, labor, and entrepreneurs do not move to markets where returns are highest. When resources refuse to move, markets do not always function efficiently
Name the four different market structures into which economists group industries
Economists group industries into perfect (pure) competition, monopolistic competition, oligopoly, and monopoly
Define "non-price competition" and provide examples of promotional campaigns used by firms.
Non-price competition is the use of advertising, giveaways, or other promotional campaigns to convince buyers that a product is better than another brand. Firms advertise heavily to make their products seem different from everyone else’s.
...What is the difference between a "geographic monopoly" and a "technological monopoly"?...
A geographic monopoly is based on the absence of other sellers in a certain area, while a technological monopoly is based on ownership or control of a manufacturing method, process, or scientific advance.
Define "public goods" and explain why private markets cannot efficiently produce them
Public goods are products collectively consumed by everyone, such as national defense or flood control. Private markets cannot produce them efficiently because it is difficult to get everyone to pay for their fair share
Regardless of the market structure, what is the primary goal for all private firms and how do they determine the output to achieve it
The primary goal for private firms is profit maximization. To achieve this, they equate marginal cost with marginal revenue to find the profit-maximizing quantity of output
Under monopolistic competition, what happens to the market if sellers raise or lower their prices significantly?
Under monopolistic competition, similar products generally sell within a narrow price range; if prices are raised or lowered enough, customers will forget minor differences and change brands.
Define "collusion" and explain why "price-fixing" is considered illegal
Collusion is a formal agreement to set prices or behave in a cooperative manner. Price-fixing, a form of collusion where firms charge similar prices, is against the law because it usually restrains trade
What are "externalities" and how do positive externalities differ from negative ones?
Externalities are unintended side effects affecting third parties; a negative externality is harm or cost suffered by others (e.g., airport noise), while a positive externality is a benefit received by someone not involved in the activity (e.g., jobs from airport expansion)
how does the nature of the product help determine the type of competition in a market?
In perfect competition, buyers and sellers exchange identical products, meaning there is no need for brand names or advertising. In monopolistic competition, firms utilize product differentiation—real or imagined differences—to attract customers and monopolize a small portion of the market
Identify the five major conditions that characterize perfectly competitive markets
The five conditions are: 1) a large number of buyers and sellers, 2) identical products, 3) each buyer and seller acts independently, 4) buyers and sellers are well-informed, and 5) buyers and sellers are free to enter or exit the business.
Explain the behavior of oligopolists when one firm in the industry announces a change, such as a discount fare
Because oligopolists are so large, they exhibit interdependent behavior; if one firm announces a change like a discount fare, other firms generally follow and match the lower prices within hours or days
what four conditions must be met for a competitive free enterprise economy to work best?
A competitive free enterprise economy works best when: 1) adequate competition exists in all markets, 2) buyers and sellers are well-informed, 3) resources are free to move between industries, and 4) prices reasonably reflect costs of production.