CCEA A Level Economics
CCEA A Level Economics A2 1 Perfect Competition and Monopoly Exam Questions
Free CCEA A Level Economics revision for A2 1 Perfect Competition and Monopoly: what you need to know, common mistakes and exam-style questions with answers. Covers assumptions of perfect competition, short and long run equilibrium, monopoly, barriers to entry, price discrimination, natural monopoly and creative destruction.
Practise A2 1 Perfect Competition and Monopoly with past papers
Once you have learnt this topic, find the A2 1 Perfect Competition and Monopoly questions in real CCEA A Level Economics past papers and mark them with the mark scheme. Doing lots of real questions is the quickest way to learn how examiners ask about each idea.
About CCEA A Level Economics A2 1 Perfect Competition and Monopoly
Perfect competition and monopoly sit at the two ends of the market structure spectrum in Unit A2 1: Business Economics. For perfect competition you need the assumptions, short-run equilibrium with supernormal profit or losses, and how entry and exit move the market to long-run equilibrium with normal profit and allocative and productive efficiency. For monopoly you need barriers to entry, the profit-maximising equilibrium, costs and benefits of monopoly, price discrimination, natural monopoly and creative destruction. CCEA papers expect accurately drawn diagrams with correctly shaded profit areas, and balanced evaluation of whether monopoly is always against the public interest.
What you need to know
- Assumptions of perfect competition Many buyers and sellers, homogeneous products, perfect information, no barriers to entry or exit, and firms are price takers facing a horizontal demand curve (P = AR = MR).
- Short and long run In the short run firms may earn supernormal profit or losses. Supernormal profit attracts new firms, shifting market supply right and lowering price until only normal profit remains (P = minimum AC); losses cause exit and the reverse.
- Efficiency in perfect competition In long-run equilibrium P = MC (allocative efficiency) and production is at minimum AC (productive efficiency).
- Monopoly equilibrium A pure monopoly is the only seller; legally a firm with over 25% market share may be investigated. It sets output where MC = MR and price from the AR curve, earning supernormal profit protected by barriers to entry such as economies of scale, patents and brand loyalty.
- Price discrimination Charging different prices to different consumers for the same product. Conditions: market power, separable markets with different PED and no resale. Higher prices are charged in the more inelastic market.
- Natural monopoly and creative destruction A natural monopoly exists when economies of scale are so large that one firm can supply the market at lower cost than two or more (e.g. water networks). Creative destruction (Schumpeter) describes how innovation can destroy existing monopolies over time.
Common mistakes in A2 1 Perfect Competition and Monopoly
- Drawing a downward-sloping demand curve for a perfectly competitive firm; the firm's demand curve is horizontal.
- Shading the profit area using MC instead of AC; profit per unit is AR minus AC at the profit-maximising output.
- Stating a monopoly charges the highest possible price; it charges the price consumers will pay at the MC = MR output.
- Ignoring the benefits of monopoly, such as economies of scale and funds for research and development.
- Listing price discrimination without the conditions needed for it to work.
Try three A2 1 Perfect Competition and Monopoly exam-style questions
1. Explain how a perfectly competitive market moves from short-run supernormal profit to long-run equilibrium. (6 marks)
Show the mark scheme answer
Supernormal profit signals to new firms; no barriers to entry so firms enter; market supply shifts right; market price falls; firms' AR = MR line falls; continues until P = minimum AC and only normal profit is earned.
2. State three conditions needed for price discrimination. (3 marks)
Show the mark scheme answer
Firm must have price-setting power; markets must be separable with different price elasticities of demand; no resale (arbitrage) between markets.
3. Evaluate the view that monopoly is always against the interests of consumers. (10 marks)
Show the mark scheme answer
Monopoly sets higher price and lower output than competition; allocatively and productively inefficient; X-inefficiency and reduced choice; but economies of scale may lower costs and prices; supernormal profit can fund research and dynamic efficiency; natural monopoly is the cheapest structure; regulation and contestability limit abuse; creative destruction; conclusion.
A2 1 Perfect Competition and Monopoly FAQs
What does CCEA A Level Economics A2 1 Perfect Competition and Monopoly cover?
The assumptions and short and long run equilibrium of perfect competition, then monopoly, barriers to entry, its costs and benefits, price discrimination, natural monopoly and creative destruction.
Which unit is this topic examined in?
It is in Unit A2 1: Business Economics, a 2 hour paper with short-answer questions, a case study and an open response question chosen from two.
Which diagrams must I be able to draw?
The perfectly competitive firm and industry side by side in the short and long run, the monopoly profit-maximising diagram with supernormal profit shaded, a price discrimination diagram and a natural monopoly diagram.
