ECE 394 Chapter Notes - Chapter 13: Perfect Competition, Market Power, Marginal Cost

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29 Jun 2016

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Competitive market: a market in which fully informed price-taking buyers and sellers easily trade a standardized good or service. Firms can freely enter and exit: free entry into a market keeps existing rms on their toe threat of collusion means that markets tend not to stay competitive when this condition is not present. Price-taker: a buyer or seller who cannot affect the market price going price is the going price. Producers are able to sell as much as they want without affecting the market price. Average revenue= total revenue / quantity sold selling one product is equal to the price of the good. Marginal revenue: total revenue in one row - total revenue in the next row (as quantity increases) revenue generated by selling an additional unit of good equal to the price of the good. Pro ts depend not just on revenue, but also on costs.

Related Questions

See the question and two answers, give brief your own opinion for each answer( are you agree on disagree with the answer, why?)

Q:This week, we are discussing market types. In this forum, please pick one of the market types that are presented in your textbook and provide your own definition (use your own words) and example. What do you think are the benefits vs. deficiencies of your chosen market type?

Answer 1)

Perfect Competition

This kind of market type stipulates the overall advantage that a market has. In this market, there are many sellers and buyers.These players do not control the price of commodities or services but the prices are controlled by the demand and supply of goods and services. As a result of this, no one can determine the market price of commodities because customers will switch to the next best alternative. All the market players in this sense are price takers and the customers that subscribe to these goods have a lot of experience about the goods offered. It means therefore that they have adequate information about the goods available, which means, therefore, they are aware of the prices that are being charged. All the firms that exist in this kind of market type have a relatively small market share because of the existence of so many of them. The market is also characterized by free entry and exit of firms. New firms can enter the market if they so wish and create competition to the existing firms. Due to this nature of many firms, most of them only earn enough to keep them on the market and nothing more for these firms (Makowski & Ostroy, 2001).

Answer 2)

The Oligopoly; best recognized by few sellers, identical (or similar) products, and its difficult entryinto the market. A good way to determine if a market has an oligopoly is if the change in one seller, causes its "competition" to change likewise. Automotive, cell phone industries, and aviation are some examples of markets that have an oligopoly. In the automotive industry, if one vehicle producer (lets say Chevrolet) changes the body style of its line up, other "completion" is soon to follow. Notice how cars these days are getting nicer and nicer for the base model? Research and Development is greatly valued in an industry that has an oligopoly. This is because if a seller lowers prices, they understand that its competitors will soon follow with ease. But, if they develop a better improvement over its last model in technology, it is much harder to follow than just a reduction in price.

The advantage of an oiligolpoly is that the leaders can set prices instead of take them. Which leads to those that are in charge having the ability to increase profit margins above what they would be in a truly free market.

The disadvantage is that for those looking to try to get into the market will have much difficulty because of the common huge capitol expenditures required to actually compete with the big boys.

1 an imperfect market, individual firms

A.are always able to set the price of their product.

B.are able to influence the price of their product.

C.have no influence over the price of their product.

D.take the market price as given.

1 Which of the following is NOT characteristic of a market economy?

Significant government intervention

Little or no government intervention

Buyers and sellers motivated by self-interest

Prices determined by demand and supply

2 In a competitive market, the price of the product is

independently set by each competing seller.

set by the market leader and then copied by other sellers.

jointly set after a meeting of all sellers in the market.

set by market supply and demand.

3 Which of the following firms participates in a competitive market?

A new car manufacturer, such as Ford, Honda, Toyota, or GMC

A software producer, such as Microsoft

A corn farmer

A local electric utility company

4 In an imperfect market, individual firms

are always able to set the price of their product.

are able to influence the price of their product.

have no influence over the price of their product.

take the market price as given.

5 Which of the following firms operates as a monopoly?

A car manufacturer

A local water utility

A corn farmer

A fish vendor at a neighborhood market

6 According to the law of demand, what is the relationship between price and quantity demanded?

Direct

No relationship

Inverse

7 Refer to the following graph. The demand curve slopes downward because
Click to view graphic. (Links to an external site.)

prices and quantity demanded move in opposite directions.

prices and quantity demanded move in the same direction.

prices and quantity demanded have no relationship.

prices and quantity demanded remain unchanged.

8 A change in which of the following will cause a change in the quantity demanded of coffee?

Consumer income

The price of green tea, a substitute for coffee

The number of coffee consumers

The price of coffee

9 Suppose that burgers and fries are complements in consumption. If the price of fries increases

overall demand for burgers will increase.

overall demand for burgers will decrease.

quantity demanded for burgers will increase.

quantity demanded for burgers will decrease.

10 Suppose that Coca Cola and Pepsi are substitutes in consumption. If the price of Coca Cola decreases, then

both the equilibrium price and the quantity of Pepsi demanded will decrease.

both the equilibrium price and the quantity of Pepsi demanded will increase.

the equilibrium price of Pepsi will increase and the quantity demanded of Pepsi will decrease.

the equilibrium price of Pepsi will decrease and the quantity demanded of Pepsi will increase.

11 According to the law of supply, what is the relationship between price and quantity supplied?

Direct

No relationship

Inverse

It depends on the change in price

12 Refer to the graph below. The supply curve is _______________ driven by the law of supply.
Click to view graphic. (Links to an external site.)

13 A change in which of the following will cause a change in the quantity supplied of coffee?

The technology or the production process of making coffee

Anticipation of a change in the price of coffee

The wages of coffee bean pickers

The price of coffee

14 Which of the following will cause a rightward shift in the supply curve for tobacco?

A fall in the number of tobacco farmers in the market

An increase in taxes on tobacco

Removal of government subsidies to tobacco farmers

An improvement in the technology used in the production of tobacco

15 Flour is a factor of production of cupcakes. How will an increase in the price of flour affect the market for cupcakes?

Overall supply will increase

Overall supply will decrease

Quantity supplied will increase

Quantity supplied will decrease

16 Refer to the following image. When a market is in equilibrium, which of the following is true?
Click to view graphic. (Links to an external site.)

Quantity supplied exceeds quantity demanded

Quantity supplied is less than quantity demanded

Quantity supplied is equal to quantity demanded

There is no relationship between quantity supplied and quantity demanded

17 Refer to the following figure. At a price of $15, this market is experiencing a(n)
Click to view graphic. (Links to an external site.)

equilibrium.

shortage.

surplus.

none of the above are true.

18 Refer to the following figure. At a price of $5, this market is experiencing
Click to view graphic. (Links to an external site.)

equilibrium.

a shortage.

a surplus.

None of the above are true.

19 Suppose pasta salad is a normal good. If the price of pasta (a major ingredient in pasta salad) increases and income also increases, the

equilibrium quantity and equilibrium price of pasta salad will increase.

equilibrium quantity of pasta salad will decrease and the equilibrium price of pasta salad may either increase or decrease.

equilibrium quantity of pasta salad may either increase or decrease and the equilibrium price of pasta salad will increase.

equilibrium quantity and equilibrium price of pasta salad will both decrease.

20. What must happen to the market price in order for a shortage to be eliminated?

Price must fall.

Price must rise.

Price must stay the same.

Price may rise or fall depending on the size of the shortage.

ECE 394 Chapter Notes - Chapter 13: Perfect Competition, Market Power, Marginal Cost

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