Markets & Government and the Economy
Assessment Task 2
This week is all about working on your second assessment task. Use this information to help you understand the implications of markets and how the government intervenes.
Types of Markets
Content Read this text before attempting the Google quiz.
Monopoly
In a monopoly market structure, there is no competition. Only one firm is selling the good or service, so can essentially set whatever price it wants for the good.
Of course, there needs to be demand for the product for firms with monopolies to make a profit, but they do not face competition from other firms to lower prices. This is bad for
consumers, because they have to accept whatever price the firm sets or go without the product at all. It is also bad for the economy as a whole because without competition, there is no incentive for firms to innovate and become more efficient.
Monopolies may develop where goods are unique so there are no close substitutes, and barriers to entry into the market are high, such as high set-up costs and regulations.
State-owned enterprises often have a monopoly, and when they are
privatised it is a challenge for the government to manage the process carefully to ensure a private monopoly does not result.
Pure Competition
Pure competition is the ideal market structure, although it only really exists in theory. In this structure, consumers wield the most power. There are many small firms selling products that are the same, so there is a constant downward pressure on price. If a firm charged a higher price, consumers would simply buy an identical, cheaper product from one of the many other sellers.
Firms are therefore price takers. There are no barriers to entry to the market, meaning that there is a constant source of competition.
Oligopoly
In an oligopoly, sellers generally have more power than consumers. There are only a few large firms and relatively high barriers to entry, which limits competition. The firms sell similar products, but with room for considerable differentiation. Firms do have to compete with each other, but prices generally remain relatively high because it is in all firms' interests not to provoke price competition, which would lead to lower prices for all. Instead, they compete on the basis of advertising and the slight differences between the products.
Monopolistic Competition
In a monopolistic market structure, consumers and sellers compete for power. There are many, generally small firms, and relatively low barriers to entry, which leads to strong competition. However, the products sold are similar but with some differences, which can give firms a competitive edge and some power to be price setters.
What a Good One Looks Like
You can use this sample response to help you think about preparing your assessment response.
This is another example of how you can create your response.
Here's a contemporary example on WATER
Screened on the ABC 11th June, 2020 730 Report
Market structure refers to the competitive environment in which the buyers and sellers of a product operate.
- a. True
b. False
Economists define a market as a place where buyers go to purchase units of a commodity.
- a. True
b. False
A market structure is defined in terms of the number and sizes of buyers and sellers on a market, the type of product traded on the market, the mobility of resources, and the amount of knowledge economic agents have about market conditions.
- a. True
b. False
If a market is perfectly competitive, then the market demand curve must be infinitely price elastic.
- a. True
b. False
If the firms in an industry are price takers, then every firm in the industry faces a horizontal demand curve.
- a. True
b. False
Firms that sell commodities on markets that are imperfectly competitive face downward-sloping demand curves.
- a. True
b. False
Monopoly is a market structure in which there is only one buyer of a product for which there are no close substitutes.
- a. True
b. False
Oligopoly is a market structure in which there are few sellers of a product and additional sellers cannot easily enter the industry.
- a. True
b. False
Monopsony is a market structure in which there is a single buyer of a commodity or input for which there are no close substitutes.
- a. True
b. False
Under perfect competition, changes in market supply do not affect market price.
- a. True
b. False
Commodities that sell for the same price are referred to as homogeneous.
- a. True
b. False
Most commodities are traded on perfectly competitive markets.
- a. True
b. False
The combination of product homogeneity and perfect knowledge ensure that a single price will prevail on a perfectly competitive market.
- a. True
b. False
Product price on a competitive market is determined by the intersection of the market demand curve with the market supply curve.
- a. True
b. False
If a firm in a perfectly competitive industry charges a higher price than that charged by other firms in the industry it will be unable to sell any of its output.
- a. True
b. False
The demand curve faced by a perfectly competitive firm is horizontal.
- a. True
b. False
A perfectly competitive firm's demand curve is above its marginal revenue curve.
- a. True
b. False
If profit maximizing firms in a perfectly competitive industry are producing 14,000 units per day, but can only sell 12,000 units per day at the current market price of $23, then the market equilibrium price must be greater than $23.
- a.
True
b. False
If profit maximizing firms in a perfectly competitive industry will produce 14,000 units per day if the market price is $23 and consumers will purchase 14,000 units per day if the market price is $20, then the market equilibrium quantity must be greater than 14,000.
- a. True
b. False
The efficient market hypothesis asserts that the price of a share of a firm's stock reflects the value implied by available information about the profitability of the firm.
- a. True
b. False
The only choice available to a perfectly competitive firm that is producing efficiently is what price to charge in order to maximize profits.
- a. True
b. False
Every profit-maximizing firm should produce a level of output where marginal revenue is equal to marginal cost.
- a. True
b. False
A perfectly competitive firm maximizes profit by producing a level of output where marginal cost is equal to price.
- a. True
b. False
If a perfectly competitive firm is producing a level of output where its marginal cost is greater than market price, it should raise its price.
- a. True
b. False
If a perfectly competitive firm is producing a level of output where price is equal to marginal cost and greater than average variable cost, then it should cease production in the short run.
- a. True
b. False
The shut-down pointof a perfectly competitive firm is at the minimum point on its short-run average variable cost curve.
- a. True
b. False
The supply curve of a perfectly competitive firm is identical to the portion of its marginal cost curve that is above its average total cost curve.
- a. True
b. False
If a perfectly competitive firm is in long-run equilibrium, then it is earning an economic profit of zero.
- a. True
b. False
If a perfectly competitive firm is in long-run equilibrium, then market price is equal to short-run marginal cost, short-run average total cost, long-run marginal cost, and long-run average total cost.
- a. True
b. False
If firms in a perfectly competitive industry are earning economic profits greater than zero, then more firms will enter the industry.
- a. True
b. False
If more firms enter a perfectly competitive industry, market equilibrium price will increase.
- a. True
b. False
A perfectly competitive firm is in long-run equilibrium when all inputs are earning their opportunity costs.
- a. True
b. False
Depreciation of a country's currency tends to make imports more expensive.
- a. True
b. False
Appreciation of a country's currency tends to increase the demand for the country's exports.
- a. True
b. False
An increase the number of U.S. dollars required to purchase one British pound would be a depreciation of the U.S. dollar and an appreciation of the British pound.
- a. True
b. False
An increase in the U.S. demand for British products would tend to cause an appreciation of the British pound.
- a. True
b. False
A monopolist's marginal revenue is below market price.
- a. True
b. False
A natural monopoly is one that results from exclusive control of a crucial natural resource.
- a. True
b. False
All monopoly power that is based on barriers to entry is subject to decay in the long run that based on government franchise.
- a. True
b. False
Monopolists always make economic profits.
- a. True
b. False
Monopolists are price takers.
- a. True
b. False
If a monopolist earns $5,000 when it sells 100 units of output and $5,025 when it sells 101 units of output, then the marginal revenue of the 101st unit is $25.
-
a. True
b. False
If a monopolist has a linear demand curve, then it has a linear marginal revenue curve.
- a. True
b. False
A profit-maximizing monopolist will never produce a quantity that corresponds to a point on the inelastic portion of its demand curve.
- a. True
b. False
A monopolist will shut down in the short run if price is everywhere less than average total cost.
- a. True
b. False
A monopolist that is earning a profit in the short run can be expected to earn at least as much profit in the long run.
- a. True
b. False
If a monopolist is in short-run equilibrium, it must be in long-run equilibrium.
- a. True
b. False
In general, if a perfectly competitive industry is taken over by a monopolist, it will charge a lower price and produce a larger quantity of output.
- a. True
b. False
When compared to perfect competition, monopoly results in a deadweight loss.
- a. True
b. False
The difference between the total amount that consumers would be willing to pay for a given level of consumption and the amount that they actually have to pay is called consumers' surplus.
- a. True
b. False
Most markets are either perfectly competitive or monopolized.
- a. True
b. False
If a firm is small, produces a differentiated good for which there are many close substitutes, and it is easy to enter and exit the industry, then the firm is a monopolistic competitor.
- a. True
b. False
Monopolistic competition is most common in the manufacturing sector.
- a. True
b. False
The short-run supply curve for a monopolistically competitive firm is identical to the upward-sloping portion of the firm's marginal cost curve above average variable cost.
- a. True
b. False
Monopolistically competitive firms are price takers.
- a. True
b. False
Monopolistically competitive firms face a downward-sloping demand curve.
- a. True
b. False
If an imperfectly competitive firm has a linear demand curve, then its marginal revenue curve has the same price intercept as its demand curve.
- a. True
b. False
If an imperfectly competitive firm has a linear demand curve, then its marginal revenue curve has a quantity intercept that is half that of the demand curve.
- a. True
b. False
As more firms enter a monopolistically competitive industry, the market supply curve shifts to the right.
- a. True
b. False
As firms leave a monopolistically competitive industry, the remaining firms' demand curves shift to the right and become less elastic.
- a. True
b. False
If a monopolistically competitive firm is in long-run equilibrium, then its short-run average total cost curve is tangent to its demand curve.
- a. True
b. False
A market that is monopolistically competitive will tend to have fewer firms than would be the case if the same market was perfectly competitive.
- a. True
b. False
Monopolistically competitive firms operate with excess capacity.
- a. True
b. False
In the long run, monopolistically competitive firms earn zero economic profit.
- a. True
b. False
Product variation is the result of quality control problems.
-
a. True
b. False
Monopolistically competitive firms attempt to minimize selling expenses.
- a. True
b. False
Selling expenses include any marketing expenditures that are intended to increase the demand for a product.
- a. True
b. False
A firm should increase expenditures on marketing and product variation up to the point where an additional dollar spent generates a marginal revenue of no less than one dollar.
- a. True
b. False
One problem with the theory of monopolistic competition is that it is difficult to define a market and to identify the firms that comprise it.
- a. True
b. False
In most cases, a monopolistically competitive market can be adequately approximated by the perfectly competitive model or the oligopoly model.
- a. True
b. False