Theory question 105
Market Structures(a) State two features each of: (i) perfect competition; (ii) monopolistic competition.
(b) What does it mean for a firm to be a: (i) price taker; (ii) price maker?
(c) Explain the following sources of monopoly power: (i) acts of parliament; (ii) copyright; (iii) natural monopoly; (iv) cartel.
Show the model answer
(a)(i) Any two: many buyers and sellers; homogeneous product; free entry and exit; perfect knowledge; firms are price takers.
(ii) Any two: many sellers; differentiated products; free entry; some control over price; heavy advertising.
(b)(i) Price taker: a firm that must accept the market price set by industry demand and supply; it cannot change it by its own output.
(ii) Price maker: a firm that can set its own price because it controls a large share of supply (e.g. a monopolist).
(c)(i) Acts of parliament: law gives one organisation the sole right to supply (statutory monopoly), e.g. a state electricity or postal corporation.
(ii) Copyright: legal right of an author/creator to exclusive production of a work for a period.
(iii) Natural monopoly: sole control of a natural resource, or economies of scale so large that one firm serves the market most cheaply.
(iv) Cartel: firms agree to act together to fix prices or output, behaving as a single monopoly (e.g. OPEC).
Sources of monopoly power are barriers that keep competitors out.