Question 1: Using a well labelled diagram, explain the nature of the demand curve of the firm in a perfect competition market. (6)

(1 point for diagram)As can be seen from the diagram above, the demand curve for the firm in a perfect competition market is a horizontal line. This is because the firm in the perfect competition market is a price taker as there are infinitely many buyers and sellers (1) . There is no barriers to entry. (1) They have perfect knowledge of the market (1) and the product is homogeneous(1). If the tries to increase his price, no one will buy from him and when he reduces his price he will not be able to increase to meet the entire demand of the market. As such the firms in a PC market is has a horizontal demand curve. (1)

2. Give 2 reasons why the monopolist is able to retain his market power in a monopoly market structure. (4)

• -There are high barriers to entry like licenses, patents and copyrights which are artificial and high cost of start up.(2)

• -They enjoy economies of scale like managerial, financial and marketing EOS (2)

• Their profits can be ploughed back into research and development to better the quality, variety product and service as well as in increasing the productivity of their labour.(2)

(Any 2 of the 3 - well explained)

Question 3. Explain why firms in an oligopoly are averse to competing for market shares by lowering prices. (4)

• -oligopoly market structure consist of several big firms that together make up a large portion of the market share. As the barriers to entry in this market is very high, the firms in an oligopoly tend to want to keep prices stable. (1)

• -however, they do want to increase market share . Lowering prices can start a price war as other firms will want to lower their prices as well and this could be very detrimental to the firms. (2)

• - firms also realize that there are less costly and detrimental ways to compete that do not involve lowering prices like advertising and better service quality. (1)

4. Discuss if the government’s pursuit to remove monopoly power is beneficial to the society. (6)

• - Under a perfect competition market, an economy is said to be enjoying economic efficiency. (1).

• . Economic efficiency is made up of allocative efficiency and productive efficiency which implies that all resources in a economy is efficiently used up to produce a goods at its lowest cost possible. (1)

• - but in a monopoly market structure, the monopolist can hold back on resources and reduce output which will cause prices to rise and quantity demanded to be reduced. This constitutes to a loss of economic efficiency and is not good for society as such removing the monopoly power is good. (2)

• - however, the monopolist enjoys economies of scales that the small firms in the PC cannot enjoy. Economies of scale allow the monopolist to produce at a very high level of output (or scales) thereby allowing it to lower cost of production to a level that may even be lower than the perfect competition price. (2) as such there are actually benefits to being a monopolist.