4.1: Imperfect Competition (copy)

Barriers To Entry

  • An Imperfectly Competitive Market Exists Because Of High Barriers To Keep Other Firms From Entering
Types Of Barriers To Entry
  1. High Fixed/start-up Costs

       1. Eg. There Is Only One Electric Company Because They Are The Only Ones That Can Make Electricity At The Lowest Cost → Natural Monopoly

  1. Geography Or Ownership Of Raw Materials
  2. Legal Barriers

       1. The Government Issues Patents To Protect Inventors And Forbids Others From Using Their Invention

Monopolies

Market Shares
  • A Monopoly May Have Competitors, But Determining Monopolies Comes Down To Market Share   * Market Share: The Proportion Of Total Sales That Are Done By One Firm
Can Monopolies Be Good For The Economy?
  • Yes, Eg. Electric Company → We Get The Best Deal By Allowing One Company To Be In Charge Of That Type Of Yield   * economies Of Scale Make It Impractical To Have Smaller Firms
  • Natural Monopoly: It Is Natural For Only One Firm To Produce Because They Can Produce At The Lowest Cost
Monopolies
  • Inefficient Because They:

     1. Charge Higher Prices   2. Don’t Produce Enough (not Allocatively Efficient)   3. Produce At Higher Costs (not Productively Efficient)

Monopolistic Competition

Monopolistic Qualities
  • Control Over Price Of Own Good Due To Differentiated Product
  • D > MR
  • Plenty Of Advertising
  • Inefficient
Perfect Competition Qualities
  • Large Number Of Smaller Firms
  • Relatively Easy Entry And Exit
  • Zero Economic Profit In Long-run Since Firms Can Enter
Differentiated Products
  • Goods Are Not Identical
  • Firms Seek To Capture A Piece Of The Market By Making Unique Goods
  • Since These Products Have Substitutes, Firms Use Non-price Competition   * Eg. Brand Names, Packaging, Product Attributes, Service, Location, Advertising   * Two Goals Of Advertising:

         1. Increase Demand     2. Make Demand More Inelastic

  • When Short-run Profits Are Made   * New Firms Enter, New Firms = More Close Substitutes And Less Market Shares For Each Existing Firm   * Demand For Each Firm Falls
  • When Short-run Losses Are Made   * Firms Exit The Marked, Less Substitutes And More Market Shares Exist For Remaining Firms   * Demand For Each Firm Rises

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