Market Structures
FAQ
Q1. What are the main characteristics of perfect competition?
A: Perfect competition is characterized by a large number of small firms, identical products, free entry and exit from the market, perfect information, and no single firm having market power. In this structure, firms are price takers, and the market determines the price based on overall supply and demand.
Q2. How does monopoly differ from perfect competition?
A: In a monopoly, there is only one firm that dominates the market, with no close substitutes for its product, significant barriers to entry, and the firm has price-setting power. In perfect competition, many firms exist, products are identical, and no single firm can influence the market price.
Q3. What is an oligopoly, and how does it affect market outcomes?
A: An oligopoly is a market structure with a few large firms dominating the market, often producing similar or slightly differentiated products. Firms in an oligopoly may engage in collusion to set prices or output, leading to less competitive outcomes. Non-collusive oligopolies lead to strategic behavior, where firms consider the potential reactions of rivals when making decisions.
Q4. What are the characteristics of monopolistic competition?
A: Monopolistic competition is a market structure where many firms sell products that are similar but not identical, allowing for product differentiation. Firms have some degree of market power, and there is relatively free entry and exit in the market. Firms compete on price as well as on product attributes like quality and branding.
Q5. How does market structure affect pricing and output decisions?
A: Market structure influences how firms set prices and output. In perfect competition, firms produce where marginal cost equals marginal revenue, at the market-determined price. In a monopoly, a firm sets a higher price and lower output to maximize profits. Oligopolies may use strategic pricing, and monopolistic competition leads to price and non-price competition.
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