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Unit notes and practice questions

Grade 11 Economics unit 2: Market structure and the decision of firms

Everything here is for unit 2 of the Grade 11 Economics textbook: what the chapter covers, the short notes, practice questions with their answers, and the lesson video where one exists.

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5
Cards
10
Practice questions on unit 2
35–69
The textbook pages for unit 2

What unit 2 covers

  1. 1.Review of Market Structures
  2. 2.Perfect Competition Market
  3. 3.Demand, Revenue and Cost Curves
  4. 4.The Short-Run Equilibrium of Firm
  5. 5.Short Run Supply Curve of a Firm
  6. 6.Long run-equilibrium of Firm
  7. 7.Pure Monopoly Market
  8. 8.Demand, Revenue and Cost under Monopoly
  9. 9.Short-run equilibrium under Monopoly
  10. 10.Price Discrimination under Monopoly
  11. 11.Monopolistic Competition Market
  12. 12.Product Differentiations and the Demand Curve
  13. 13.Costs under Monopolistic Competition
  14. 14.Short- run Equilibrium under Monopolistic Competition
  15. 15.The Concept of Industry and Product Group
  16. 16.Oligopoly Market
  17. 17.Collusive Oligopoly
  18. 18.Non-collusive Oligopoly

Short notes for unit 2

The cards filed under this chapter on the Grade 11 Economics page. Open one at a time.

DegreePricing MechanismExample
First degreeCharges maximum reservation price to each consumerDoctor charging by patient wealth
Second degreePrices differ by quantity bought or quality tierBulk purchase discounts, airline seat classes
Third degreeMarket segmentation by consumer group elasticityDiscounts for students and senior citizens

When you use it

Use when identifying how a monopolist charges different prices to capture consumer surplus.

Watch out

In first degree price discrimination, consumer surplus becomes zero and there is no deadweight loss because the monopolist captures all surplus.

Drafted from Grade 11 Economics, pages 35-69, then checked twice before it went up

MR=MCMR = MC
MRMR
Marginal revenueETB\text{ETB}
MCMC
Marginal costETB\text{ETB}

When you use it

Use to find the optimal output level for any profit-maximizing firm in competitive, monopoly, or monopolistic markets.

Watch out

The first condition MR = MC is not sufficient. The marginal cost curve must cut the marginal revenue curve from below, meaning the slope of MC must be steeper than the slope of MR.

Drafted from Grade 11 Economics, pages 35-69, then checked twice before it went up

Price ConditionEconomic OutcomeShort-Run Decision
P>ATCP > ATCSupernormal profitContinue production
P=ATCP = ATCZero profit (Break-even)Continue production
AVC≤P<ATCAVC \le P < ATCEconomic lossContinue production to cover fixed cost
P<AVCP < AVCSevere loss exceeding fixed costShut down immediately

When you use it

Use to determine whether a competitive firm should continue producing at a loss or shut down in the short run.

Watch out

The shutdown point occurs at minimum AVC, not at minimum ATC. If price is above AVC, producing minimizes losses compared to shutting down.

Drafted from Grade 11 Economics, pages 35-69, then checked twice before it went up

When you use it

Use when evaluating whether a firm operating at a loss should cease operations immediately in the short run.

Watch out

Do not assume a firm must shut down whenever price is below average total cost. If the price covers average variable cost (P≥AVCP \ge AVC), the firm continues operating in the short run to offset part of its fixed costs.

Drafted from Grade 11 Economics, pages 35-69, then checked twice before it went up

Market StructureNumber of SellersProduct TypePrice Control
Perfect competitionVery manyHomogeneousPrice taker (P=MRP = MR)
Monopolistic competitionManyDifferentiatedSome discretion
OligopolyFew dominant sellersHomogeneous or differentiatedInterdependent
Pure monopolySingle sellerUnique without close substitutesPrice setter

When you use it

Use when classifying an industry or comparing the degree of competition across the four market models.

Watch out

Do not confuse monopolistic competition with monopoly. Monopolistically competitive markets contain many sellers with differentiated products, not a single firm.

Drafted from Grade 11 Economics, pages 35-69, then checked twice before it went up

Practice questions on unit 2

10 multiple-choice questions written against this chapter, each with its answer and the reason. Try one before you open the answer.

Question 1

What is the correct sequence of market structures from the most competitive to the least competitive?

  1. A.Perfect competition, monopolistic competition, oligopoly, pure monopoly
  2. B.Pure monopoly, oligopoly, monopolistic competition, perfect competition
  3. C.Perfect competition, oligopoly, monopolistic competition, pure monopoly
  4. D.Monopolistic competition, perfect competition, pure monopoly, oligopoly
Show the answer and why

Answer: A Perfect competition, monopolistic competition, oligopoly, pure monopoly

Why

The textbook states that the correct sequence from most to least competitive is perfect competition, monopolistic competition, oligopoly, and pure monopoly.

Question 2

Why does an individual firm in a perfectly competitive market face a horizontal demand curve?

  1. A.The firm is a price setter that can choose any price it wants.
  2. B.The firm is a price taker and can sell any quantity at the market price.
  3. C.The firm sells differentiated products that have no close substitutes.
  4. D.The firm colludes with other producers to fix the market price.
Show the answer and why

Answer: B The firm is a price taker and can sell any quantity at the market price.

Why

In a perfectly competitive market, individual firms are price takers. They face a horizontal (perfectly elastic) demand curve where price equals average revenue and marginal revenue (P = AR = MR).

Question 3

In a pure monopoly market, what is the relationship between the demand curve and the marginal revenue (MR) curve?

  1. A.The MR curve is horizontal and lies above the demand curve.
  2. B.The MR curve is identical to the demand curve at all output levels.
  3. C.The MR curve is downward-sloping and lies beneath the market demand curve.
  4. D.The MR curve is upward-sloping while the demand curve is downward-sloping.
Show the answer and why

Answer: C The MR curve is downward-sloping and lies beneath the market demand curve.

Why

A monopolist faces a downward-sloping demand curve, and its marginal revenue curve always lies beneath the market demand curve, decreasing twice as fast as demand.

Question 4

A cinema in Addis Ababa charges a lower entrance fee to students than to other adults. What degree of price discrimination does this represent?

  1. A.First-degree price discrimination
  2. B.Second-degree price discrimination
  3. C.Third-degree price discrimination
  4. D.Zero-degree price discrimination
Show the answer and why

Answer: C Third-degree price discrimination

Why

Third-degree price discrimination (market segmentation) involves charging different prices to different consumer groups, such as discounts for students or senior citizens.

Question 5

In the short run, at what price level must a perfectly competitive firm decide to shut down immediately?

  1. A.When the price is below the minimum average total cost (ATC)
  2. B.When the price is below the average variable cost (AVC)
  3. C.When the price is equal to the marginal cost (MC)
  4. D.When total revenue is equal to total fixed cost
Show the answer and why

Answer: B When the price is below the average variable cost (AVC)

Why

If the market price falls below the shutdown point (the intersection of AVC and MC), the firm fails to cover even its variable costs and must shut down immediately to avoid larger losses.

Question 6

Which part of a firm's cost curves constitutes the short-run supply curve of a perfectly competitive firm?

  1. A.The entire average total cost curve
  2. B.The portion of the average fixed cost curve that slopes downward
  3. C.The portion of the marginal cost curve that lies above the average variable cost curve
  4. D.The portion of the marginal cost curve that lies below the average total cost curve
Show the answer and why

Answer: C The portion of the marginal cost curve that lies above the average variable cost curve

Why

The short-run supply curve of a perfectly competitive firm is that portion of the marginal cost curve which is above the average variable cost curve.

Question 7

What is the condition for a perfectly competitive firm to achieve long-run equilibrium?

  1. A.LMC = LAC = P and the firm earns supernormal profit
  2. B.LMC = LAC = P and the firm earns normal profit
  3. C.P is greater than LAC at the profit-maximizing output
  4. D.MR is greater than MC at the minimum point of SAC
Show the answer and why

Answer: B LMC = LAC = P and the firm earns normal profit

Why

In the long run, entry and exit of firms adjust the market so that LMC = LAC = P = MR. At this point, firms produce at the minimum point of the LAC curve and earn only normal profits (zero economic profits).

Question 8

What is a distinctive feature of first-degree price discrimination?

  1. A.The seller charges different prices based on quantity purchased or bulk discounts.
  2. B.The seller divides the market by geographic location or customer age groups.
  3. C.The seller charges each consumer their exact reservation price, resulting in no deadweight loss.
  4. D.The seller charges one single uniform price to all buyers in the market.
Show the answer and why

Answer: C The seller charges each consumer their exact reservation price, resulting in no deadweight loss.

Why

First-degree (perfect) price discrimination occurs when the seller knows the maximum reservation price of every consumer and charges that price, turning all consumer surplus into revenue and leaving no deadweight loss.

Question 9

A perfectly competitive firm faces a market price of 100 Birr. Its total cost function is given by C = Q2 + 20Q + 700, where marginal cost is MC = 2Q + 20. What is the profit-maximizing level of output?

  1. A.20 units
  2. B.40 units
  3. C.60 units
  4. D.80 units
Show the answer and why

Answer: B 40 units

Why

For a competitive firm, profit is maximized where P = MC. Setting 100 = 2Q + 20 gives 2Q = 80, which solves to Q = 40 units.

Question 10

Under the marginal revenue and marginal cost (MR-MC) approach, what is the second-order (sufficient) condition for profit maximization?

  1. A.Marginal revenue must be equal to average revenue.
  2. B.The marginal cost curve must cut the marginal revenue curve from above.
  3. C.The slope of the marginal cost curve must be greater than the slope of the marginal revenue curve.
  4. D.Average total cost must be at its minimum point.
Show the answer and why

Answer: C The slope of the marginal cost curve must be greater than the slope of the marginal revenue curve.

Why

The first condition is MR = MC. The second condition requires that MC cuts MR from below, which means the slope of the marginal cost curve must be steeper (greater) than the slope of the marginal revenue curve at the point of equality.

The app holds 12 questions on this unit, marked as you go. These are the first 10.

Lesson video for unit 2

A lesson on this chapter from YouTube. It loads only when you press play.

Economic profit vs accounting profit · Watch on YouTube

More lessons on this unit

The textbook pages for unit 2

Unit 2 runs from page 35 to page 69 of the Ministry of Education edition.

Ministry of Education edition, English, 202 pages

Download the PDF

All Grade 11 Economics short notes

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