What is a competitive market?
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What is a competitive market?
A competitive market is a market with many sellers and an extremely high degree of competition.
Define the term price taker.
A price taker is a firm that must accept the prevailing market price and has no influence over it.
What is the main feature of the product in a competitive market?
In a competitive market, the products are homogenous, meaning they are identical or perfect substitutes.
State the meaning of barriers to entry.
Barriers to entry are obstacles that make it difficult for new firms to enter a market.
What does perfect knowledge mean in a competitive market?
Perfect knowledge in a competitive market means that buyers and sellers possess exactly the same knowledge of prices and product information.
How does competition affect prices in competitive markets?
Competition causes firms to lower prices for consumers in an attempt to gain market share.
True or False?
Competitive markets lead to better quality products.
True.
In competitive markets, firms innovate and continuously seek to improve the quality of their goods and services.
True or False?
The formula for calculating the price elasticity of demand is:
PED = % change in price ÷ % change in quantity demanded
False.
PED = % change in quantity demanded ÷ % change in price
What is the definition of product differentiation?
Product differentiation is the process of distinguishing a product or service from others to make it more attractive to customers.
What is a substitute good?
A substitute good is a product that can be used in place of another to satisfy the same need or want.
How does competition affect worker welfare?
Competition may harm worker welfare. In competitive markets, the need to cut costs often results in low wages and poor working environments.
What is a monopoly?
A monopoly is a market structure in which there is a single seller.
Define the term market power.
Market power is the ability of a firm to influence the market price of its product or service.
How do monopolies control prices and output?
In a monopoly, due to the lack of competition the firm has complete market power and is able to set prices and control output.
State the meaning of barriers to entry in a monopoly.
Barriers to entry are significant obstacles that make it difficult for competitors to enter the market in order to compete, e.g. the start-up costs of launching a new airline are significant and prevent many firms from entering the market.
What does price discrimination mean?
Price discrimination is the practice of charging different prices to different customers for the same product or service.
What is meant by cross-subsidisation?
Cross-subsidisation is the practice of using profits from one product or service to subsidise a reduction in the price of another.
How do monopolies impact product innovation?
Product innovation often stalls in a monopoly market structure. Due to a lack of competition, monopolies sometimes lack incentives for effective product innovation.
True or False?
Monopolies lead to a misallocation of resources.
True.
Monopolies lead to a misallocation of resources as they limit supply in order to increase prices.
True or False?
Diseconomies of scale are cost advantages that a firm experiences as it grows larger.
False.
Diseconomies of scale are cost disadvantages that a firm experiences as it grows larger.
How do monopolies impact consumer prices?
A lack of competition in a monopoly is likely to result in higher prices for consumers as no substitute goods are available.