A Level Economics AQA Practice Exam

What are the two extremes of market structures in the spectrum of competition?

1. Monopoly and oligopoly

2. Monopoly and perfect competition

3. Monopolistic competition and perfect competition

4. Monopoly and perfect oligopoly

The correct answer is: Monopoly and perfect competition

The correct answer is monopoly and perfect competition because these two represent the polar ends of the market structure spectrum. Monopoly is a market structure characterized by a single firm dominating the market. This firm has significant pricing power, barriers to entry are high, and it can set prices above the competitive level, which often leads to a loss of consumer surplus and inefficiency in resource allocation. On the opposite end, perfect competition describes a market structure where many firms sell identical products, and no single firm can influence the market price. There are no barriers to entry or exit, and all firms are price takers, leading to an efficient allocation of resources where consumer and producer surplus is maximized. These two extremes help illustrate the range of competition levels and the efficiency of markets. Monopolies tend to result in market failures, while perfectly competitive markets achieve optimal efficiency. The other options either include structures that do not represent extremes or mischaracterize the relationships between different types of market competition.