AQA A Level Economics
AQA A Level Economics 3.1.5 Perfect Competition, Imperfectly Competitive Markets and Monopoly Exam Questions
Free AQA A Level Economics exam questions for 3.1.5 Perfect Competition, Imperfectly Competitive Markets and Monopoly, with a mark scheme for every pack. Covers objectives of firms, perfect competition, monopolistic competition, oligopoly, game theory, monopoly, price discrimination, efficiency and contestable markets.
3.1.5 Perfect Competition, Imperfectly Competitive Markets and Monopoly exam questions
1 question pack of real past exam questions, each with its mark scheme. Do not stop after a few: answer as many as you can without notes, then mark every answer with the mark scheme. The more questions you do, the more quickly you will spot how examiners ask about each idea.
About AQA A Level Economics 3.1.5 Perfect Competition, Imperfectly Competitive Markets and Monopoly
This section of AQA A Level Economics, 3.1.5, applies costs and revenue to different market structures and is examined on Paper 1. It covers the objectives of firms, including profit maximisation, revenue maximisation and satisficing; the spectrum of competition; perfect competition in the short and long run; monopolistic competition; oligopoly, including concentration ratios, collusion, price wars and simple game theory; monopoly and monopoly power, including its costs and benefits; price discrimination; the dynamic efficiency of competitive markets; and contestable and non-contestable markets. Examiners expect accurate diagrams and strong evaluation of efficiency, using allocative, productive, dynamic and X-efficiency.
What you need to know
- Objectives of firms Profit maximisation at MC = MR is the traditional assumption, but firms may maximise revenue (MR = 0), sales or growth, or satisfice due to the divorce of ownership from control and the principal-agent problem.
- Perfect competition Many firms, identical products, perfect information and free entry and exit. Firms are price takers. Short-run supernormal profits attract entry until only normal profit is made in the long run, where the firm is allocatively and productively efficient.
- Monopolistic competition Many firms selling differentiated products with low barriers to entry. Firms may earn supernormal profit in the short run, but entry reduces this to normal profit in the long run, with excess capacity.
- Oligopoly A few interdependent firms, measured by concentration ratios. Firms may collude (overt or tacit) or compete; non-price competition is common. Simple two-firm game theory (payoff matrices) shows why cartels are unstable. Know price wars and predatory and limit pricing.
- Monopoly A single seller (or a firm with 25 percent or more market share for UK legal purposes) protected by barriers to entry. It can earn supernormal profit in the long run and is allocatively inefficient, but may gain economies of scale and fund innovation. Natural monopolies arise where LRAC falls over the whole market output.
- Price discrimination Charging different prices to different groups for the same product requires market power, separable markets with different PEDs and no resale. It raises producer surplus and may increase output.
- Efficiency and contestability Know static efficiency (allocative where P = MC, productive at minimum AC), dynamic efficiency and X-inefficiency. A contestable market has low entry and exit barriers and no sunk costs, so the threat of entry can keep prices close to competitive levels.
Common mistakes in 3.1.5 Perfect Competition, Imperfectly Competitive Markets and Monopoly
- Drawing a perfectly competitive firm with a downward sloping demand curve. The firm's AR = MR curve is horizontal at the market price.
- Claiming monopoly is always bad. Evaluate: economies of scale and supernormal profit for research may lead to lower costs and dynamic efficiency.
- Saying a contestable market must have many firms. Contestability depends on entry and exit barriers, so even a market with one firm can be contestable.
- Writing that price discrimination always harms consumers. Some consumers pay less, and output may rise, but consumer surplus is converted into producer surplus.
- Giving the profit-maximising point as where MC equals AC. Profit is maximised where MC = MR.
Try three 3.1.5 Perfect Competition, Imperfectly Competitive Markets and Monopoly exam-style questions
1. Explain the conditions necessary for a firm to practise price discrimination. (4 marks)
Show the mark scheme answer
The firm must have price-making power; it must be able to separate consumers into groups; the groups must have different price elasticities of demand; it must prevent resale (arbitrage) between groups.
2. Using a payoff matrix, explain why firms in an oligopoly may cheat on a collusive agreement. (6 marks)
Show the mark scheme answer
Each firm chooses between keeping the agreed high price or cutting price; a correctly constructed matrix showing joint profit highest if both keep the high price; each firm can earn more by cutting price if the other keeps it high; so cutting is the dominant strategy; both end up with lower profits; shows interdependence and why cartels are unstable.
3. Evaluate the view that monopoly is always against the public interest. (25 marks)
Show the mark scheme answer
Explain monopoly sets output where MC = MR and price above MC so it is allocatively inefficient; loss of consumer surplus and possible X-inefficiency; evaluate: economies of scale may give lower prices than competition; supernormal profit may fund innovation (dynamic efficiency); natural monopolies may be most efficient with one firm; contestability can limit abuse; regulation can protect consumers; supported overall judgement.
3.1.5 Perfect Competition, Imperfectly Competitive Markets and Monopoly FAQs
What does AQA A Level Economics 3.1.5 cover?
It covers objectives of firms, perfect competition, monopolistic competition, oligopoly and game theory, monopoly, price discrimination, types of efficiency, and contestable markets.
Which paper is 3.1.5 examined in?
It is assessed on Paper 1, Markets and market failure, and can also appear on Paper 3, Economic principles and issues, which draws on the whole specification.
Which diagrams should I learn for market structures?
Learn the perfect competition firm and industry diagrams in the short and long run, monopolistic competition in the short and long run, the monopoly diagram with supernormal profit and deadweight loss, price discrimination and the natural monopoly diagram.
