CIA4U Economics Chapter 5

Perfect Competition

A market structure characterized by:

• Many buyers and sellers of a

• Standard product (Every company has the exact same)

• Easy entry to and exit from the industry

(Eg. Agriculture, Fishing)

Monopolistic Competition

A market structure characterized by:

• Many buyers and sellers

• Slightly different products

• Easy entry to and exit from the industry

(Eg. Restaurants)

Oligopoly

A market structure characterized by: o

• Only a few businesses offering standard or similar products

• Restricted entry to the industry

(Eg. Cars)

Monopoly

A market structure characterized by:

• Only one business supplying a product with no close substitutes

• Restricted entry to the industry

(Eg. Public Utilities)

Entry Barriers

Economic or institutional obstacles to businesses entering an industry

List: Six Entry Barriers

1. Increasing Returns to Scale

2. Market Experience

3. Restricted Ownership of Resources

4. Legal Obstacles

5. Market Abuses

6. Advertising

Natural Monopoly

A market in which only one business is economically viable because of increasing returns to scale

Predatory Pricing

Form of Market Abuse where businesses temporarily lower prices to drive out competitors in an industry

Market Power

A business’s ability to affect the price of the product it sells

Businesses Demand Curve

The demand curve faced by an individual business, as opposed to an entire market

Average Revenue

A business’s total revenue per unit of output.
Formula: Average Revenue = Total Revenue ÷ Quantity of Output

Marginal Revenue

The extra total revenue earned from an additional unit of output. During perfect competition, this is equal to the price.
Formula: Average Revenue = Change in Total Revenue ÷ Change in Quantity of Output

Profit-maximizing output rule

Producing at the level of output where marginal revenue and marginal cost intersect

Formula: Profit-maximizing output rule: Marginal revenue = Marginal cost

Normal Profit

The minimum return necessary for owners to continue operating a business

Breakeven Point

The profit-maximizing output where price (or average revenue) equals average cost

Shutdown Point

The level of output where price (or average revenue) equals minimum average variable cost

Business Demand Curve

The demand curve faced by an individual business, as opposed to an entire market. During perfect competition, it is horizontal.

Business Supply Curve

Curve that shows the quantity of output supplied by a business at every possible price. During perfect competition, it is the section of the marginal cost curve after the shutdown point.