Markets Exam Study Guide: Chapter 4

1. What are the four conditions for perfect competition? (Be prepared to apply each one in a question.)

2. Why are barriers to entry detrimental to perfect competition?

3. What is a monopoly?

4. What is a natural monopoly? Provide an example in Stockton.

5. According to your text, how can technology destroy natural monopolies?

6. How can a franchise create a natural monopoly?

7. Why do governments sometimes grant a specific license to certain firms within a natural monopoly?

8. What is price discrimination? Why would firms charge different prices for the same good to different customer groups?

9. How does price discrimination benefit consumers and producers?

10. What is monopolistic competition? Why is the market for denim considered monopolistic?

11. What are the four conditions for monopolistic competition? (Be prepared to apply each one.)

12. What is an oligopoly?

13. How are video game console makers considered an oligopoly? How do they compete without cutting prices?

14. What are the three practices that concern government regulators in the context of oligopolies?

15. What is market power?

16. What are anti-trust laws?

17. Why and how do governments break up monopolies?

18. How can customers be disadvantaged when two competitors merge?

19. What is deregulation? How can deregulation be both beneficial and harmful to consumers?

1. The four conditions for perfect competition are: (1) many buyers and sellers, (2) homogeneous products, (3) perfect information, and (4) ease of entry and exit.

2. Barriers to entry are bad for perfect competition because they limit the number of competitors in the market and prevent new entrants from entering the market, which can lead to market power and higher prices for consumers.

3. A monopoly is a market structure where there is only one seller of a good or service. The monopolist has complete control over the market and can set prices at a level higher than would be possible in a competitive market.

4. A natural monopoly is a market where one firm can produce the good or service more efficiently than any potential competitor. An example in Stockton is the local water utility, which is a natural monopoly because the cost of building and maintaining the infrastructure required to deliver water is too high for multiple firms to be able to compete effectively.

5. Technology can destroy natural monopolies by creating new and cheaper methods of producing the good or service, which can make it possible for multiple firms to compete.

What is the perfect competition?

Perfect competition is an idealized market structure in economics, characterized by a large number of small firms producing a homogeneous product, no barriers to entry or exit, and perfect knowledge of prices and market conditions.

Therefore, In this type of market, each firm is a price taker and no single firm has enough market power to influence the market price. The outcome is that the market price equals the marginal cost of production and leads to an efficient allocation of resources.

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