ECONOMICS
Market Structure - Ch 7
1. Describe characteristics and give examples of perfect competition (pure competition).
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Many buyers and sellers participate in the market (famers market);
Sellers offer identical products (oranges and shoes);
Informed buyers and sellers (car dealerships, computers);
Ability for sellers to enter or exit the market freely (restaurants, consultants service)
2. How do start-up costs discourage entrepreneurs from entering the market?
High start up costs discourage new ventures by creating the potential for large losses; many people are
unwilling to take the risk of starting a new business
.
3. What is an example of barriers to entry in the magazine market?
Start up costs – example: office space
Technology - example: word processing equipment
4. Why does government usually approve of natural monopolies?
They operate at a lower cost to both consumers and producers, so they are generally allowed because they
are the most efficient source of that good or service
5. What are three different forms of price competition?
1) Discounted airline fares
2) Manufacturer’s rebate offers
3) Senior citizen or student discounts
4) Kids fly or stay free promotions
6. What are economies of scale?
When an economies of scales exist, a firm’s start-up costs are high, but its average costs fall for each unit it
produces, even at a level of output high enough to supply the entire the market
7. What are the four conditions of monopolistic competition?
1)
2)
3)
4)
Many firms
Few artificial barriers to entry
Slight control over price
Differentiated products
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8. How do economists determine whether a market is an oligopoly?
If the four largest firms produce at least 70 to 80 percent of the market’s output.
9.
Give three examples of non-price competition?
1) Physical characteristics
2) Location
3) Service Level
4) Advertising
5) Image
6) Status
10. How would price fixing and collusion help producers?
Price fixing aids producers by inflating prices unnaturally. Collusion occurs when sellers group together, set
higher prices for goods and services, and earn greater revenues as a result.
11. What is the purpose of antitrust laws?
They are designed to encourage competition in the marketplace.
12. Under what conditions will the government approve a merger?
Only when the combined company will not be able to exert unfair control over market prices
13. How does predatory price hurt competition?
It usually leads to one or more firms being forced out of a market, limiting consumer choice and competition,
and resulting in higher prices.
14. How did deregulation change the banking and air travel industries?
Banking deregulation led to the Savings and Loan Crisis in the 1980s, as banks had more freedom to make
riskier investments. Airline deregulation led to some mergers and some firms dropping out of the business
but also to lower air fares for consumers.
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EXTRA CREDIT! (8 points each)
15. What is disequilibrium?
When the quantity demanded is not equal to the quantity supplied in a market.
16. Describe what demand and supply curves look like.
Demand curve decreases from left to right while supply curves increases from left to right.
Week 7 of 10.
The 6th quiz towards your midterm.
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