Competitive and concentrated markets

What factors are used to distinguish between market structures?

Number of firms, the degree of product differentiation, easy entry into market

What are firms main objectives?

Profit, survival, growth, increasing market share

What are the characteristics of a perfectly competitive market?

• many buyers & sellers

• Each buyer posses perfect information

• Each consumer is able to buy & each producer is able to sell as much as they wish as the ruling price

• Market price is determined by interaction of all the buyers & sellers

• only one goon being traded (each good is identical)

• No barriers which prevent new firms from entering the market in the long run or that prevent firms from existing in a market

Why are profits likely to be lower in a competitive market?

Dominated by a few large firms

What is a pure monopoly?

Only one firm in the market

What is a monopoly power?

The power of a firm acts as a price maker

What is consumer sovereignty?

Through exercising their spending power, consumers collectively determine what is produced in a market, its the strongest in a competitive market

What factors is monopoly power influenced by?

Barriers to entry, the number of competitors, advertising and the degree of product differentiation

What is perfect competition?

Many buyers & sellers each processing perfect information, where market price is determined by the interaction of all buyers and sellers

What is monopolistic competition?

Imperfect competition among the many. Firms have many competitors but each one sells a slightly different product

What is an oligopoly?

A few mutually interdependent firms each needing to take account of its rivals reactions when deciding on market strategy

What is a duopoly?

Two firms only in a market

What is a monopoly?

One firm producing 100% of market output. Price makers.

What is market structure?

The organisation of a market in terms of the number of firms in the market and the ways in which they behave

What is a natural monopoly?

A company or firm has complete control of a natural resource or there is only room in the market for one firm benefiting from economies of scale to the full e.g. national rail, flight radar

What is a geographical monopoly?

A pure monopoly can occur if, for climate or geographical reasons, a country is the only supply of raw material or foodstuff e.g. India & cardamom. Alternately a coal market with one shop, where it would not be viable for another shop to open

What is a government creates monopoly?

Governments can create monopoly's in markets they believe are too important o lave to competition. These can be state owned e.g. coal in the 1940s, or private monopoly’s e.g. Camelot

What are reasons against monopolies?

• can exploit consumers by extricating output & raising price (cold result in resource misallocation)

• May be productively inefficient

What are reasons in favour of monopolies?

• economies of scale

• Can use high profits to finance product innovation

What are the monopolistic characteristics?

• low number of competitors

• Large natural barriers to entry

• Large artificial barriers to entry

• Little advertisement

• Lots of product differentiation

• Price maker

• Downward sloping demand curve

What is producer sovereignty?

Producers in a market determine what is produced & what prices are charged

What is the case against monopolies?

• they exploit customers by restricting output & raising price (causes market failure and resource misallocation)

• They may be productively & allocatively inefficient (no pressure to reduce costs, no threats of new entrants, reduced quality of product & service)

What are the potential benefits of monopolies?

• economies of scale ( benefit from lower LRAC)

• Intervention & innovation (benefit from patent, can use high profits to finance product innovation)

What are the objectives of firms?

• profit maximisation

• Sales maximisation

• Growth maximisation

• Market share maximisation

• survival

What are characteristics of a perfectly competitive market?

Many buyers and sellers, firms sell identical products, no barriers to entry or exit, price takers

How do you calculate a concentration ratio?

Add up the percentages of the specific firms (i.e., four-firm concentration ratio = sum of the top 4 firm percentages)