3.8 Market Structure (Cambridge (CIE) IGCSE Economics)

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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.