Cambridge IGCSE and O Level Economics
Chapter 23: Market structure
Suggested answers to individual and group activities
Group activities
1 a
A consumer may prefer to buy one firm’s products over that of rival firms if the products are
cheaper, have better quality or enjoy a better brand image.
b If a firm’s products become more popular than those of its rivals, it will attract more
customers and gain a higher market share.
2 a A
irlines – barriers to entry include take-off and landing slots at airports, safety requirements
and brand loyalty.
b Film production – possible barriers include brand loyalty and monopoly ownership of retail
outlets.
c Steel production – barriers to entry include high set-up costs and scale of production.
d Window cleaning – there are few barriers to entry into this market. It is cheap to enter and
leave, start-up costs are low, large-scale production does not lower unit costs significantly
and branding and advertising are not particularly significant.
Individual activities
Competitive Market
Monopoly
Level of competition
high
none
Number of producers
many
one
Barriers to entry
low or none
high
Type of long run profit
normal
supernormal
Influence on price
limited or none
price maker
Number of substitutes
many
none
Suggested answers to multiple choice questions and
four-part question
Multiple choice questions
1 A
A competitive market has easy entry and exit. Each market has a small market share. There are a
large number of both buyers and sellers.
2 B
A monopoly, in the sense of a pure monopoly, has no competitors. It is a price maker, has a 100%
share of the market and is protected by barriers to entry.
3 C
In the short run, many firms under conditions of both monopoly and competitive market
conditions can earn supernormal profits, provided demand is high. In the long run, however,
supernormal profit can be earned only by a monopolist but it is unlikely to be earned by
competitive firms. This is because competitive firms’ profits are not protected by barriers
to entry.
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Cambridge IGCSE and O Level Economics
4 A
If consumers become attracted to a particular brand, they become reluctant to switch to a
product made by a new firm. B, C and D would all make it easy for a new firm to enter the market.
Four-part question
a A barrier to entry is an obstacle that makes it difficult for a firm that is not currently in the market
to start producing in it or within it.
b A competitive market is one in which there are a large number of firms trying to sell to the same
group of consumers. This puts pressure on the firms to keep prices low and quality high.
There is usually relatively free entry into and exit from the market. A firm that is not producing
the product can start making it without experiencing any major difficulty. Similarly, any firm that
wants to stop making the product will be able to leave the market relatively easily.
c If the number of firms in a market goes from a high number to one, the type of profits earned
may change in the long run. In a very competitive market, the long run profit earned is likely to be
normal profit. If the firms enjoy a higher profit in the short run, new firms would be attracted into
the market. The increase in supply would drive down price and return profit to the normal level.
In contrast, if a market moves to a monopoly, supernormal profit may be earned. Not having
competitors may result in the firm driving up price. Consumers may pay the higher price as they
will not have alternatives to switch to.
d A monopoly is often thought to be harmful to consumers. If there is only one firm in the market,
consumers do not have a choice of producers. The choice of products may also be limited with
few variations in the goods or services made.
There will be a lack of competitive pressure for a monopolist to keep price low and quality high.
Consumers will not be able to switch to rival firms if they think the monopolist is charging a high
price and producing products of a low quality.
The lack of competition may mean that the monopolist becomes inefficient. It may not make
much effort to keep costs low, to respond to changes in consumer demand and to innovate to
improve production methods and the quality of the product.
Of course, a monopoly may be defined as a firm that has 25% or 40%-plus share of the market.
In these cases, there will be some competition in the market. Three large firms, for example, may
compete quite rigorously. A firm might also have a 100%-share of the domestic market but may
still face foreign competition.
There is also the possibility that one firm controlling the market may benefit consumers. One
large firm, instead of a number of smaller firms, may be able to take advantage of economies
of scale. Having lower costs of production may mean that, even with a larger profit margin,
the price charged by the monopolist may be lower than that which would exist in a more
competitive market.
The quality of the products produced by a monopoly may be higher. This is because the higher
profit that a monopoly may earn may be used to finance spending on research and development,
improving existing products and developing new ones.
A monopolist may also charge a relatively low price and produce a good quality product in order
to discourage new firms from trying to enter the market. In addition, while consumers will not
have a choice of producers in a monopoly market, a monopoly may produce a range of variations
of products.
© Cambridge University Press 2018
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