4 - Competitive + Concentrated Markets Flashcards
Market structures?
No. of firms in a market and the ways in which they behave
Price taker?
Firms have no control over their prices, the market does
It always has a perfectly elastic demand curve
If a firm increases the price, quantity sold will drop to 0
Price maker?
A firm possessing the power to set the price within the market
(Usually monopolists)
Perfection competition is a form of marker structure that requires 6 conditions to hold:
- large no. of buyers/sellers in the market
- each buyer/seller possesses perfect info of what is happening in the market
- consumers buy and producers sell as much as they wish at the ruling market price
- products are identical, therefore consumers can always switch products from different firms
- firms are profit maximisers, all their decisions are made towards maximising profit
- no barriers to enter/exit
It leads to allocative efficiency
(Ask ejaz)
It leads to productive efficiency
(Ask ejaz)
Concentrated markets
PURE MONOPOLY
- only 1 firm in the market
MONOPOLY POWER
- the power of a firm to act as a price maker rather than a price taker
Imperfect competition
Any market structure lying between the extremes of perfect competition and pure monopoly
There are many sellers but they are selling dissimilar goods
as opposed to the uniform goods produced in a perfectly competitive market
Objectives of firms
PROFIT maximisation
- when a firm’s total sales revenue is furthest above total cost of production
Firms will resist growth or grow depending on what the owner believes will lead to higher profits
SALES maximisation
- occurs when sales revenue is maximised
Other possible business objectives
GROWTH maximisation
- occurs when the decision makers within a firm try to make the firm grow as fast as possible
even though it may conflict with profit maximisation
The decisions tend to be made by managers, which could lead to a conflict of interest:
- managers often favour fast growth as it increases their salaries
- firm owners are interested in maximising profit instead
MARKET SHARE maximisation
- when a firm maximises its % share of the market in which it sells its product
It tends to accompany growth maximisation, increasing the % of market output which the firm produces
Price determination in a competitive market
(Pictures on pg 78-79)
Barriers to entry
The ‘height’ of these barriers determines:
- HOW LONG it will take
- HOW EXPENSIVE it will be
For a new entrant to establish itself in a market and increase the amount of competition
AND
- whether new entrants can successfully join the market at all
It varies between markets
Perfectly competitive markets
- NO BARRIERS at all
Pure monopoly market
- Barriers is entry are TOTAL
- No new firms can enter
Barriers to entry due to incumbent firms’ actions
AN INNOVATIVE NEW GOOD/SERVICE
can give a firm a head start over its rivals which can be difficult for a new entrant to overcome
STRONG BRANDING
some products are well known to consumers
☝🏽
the familiarity of the product often makes it a first choice
☝🏽
therefore putting new entrants at a disadvantage
AGGRESSIVE PRICING TACTICS
Incumbent firms may be able to lower prices to a level that a new entrant cannot match and drive them out of business
Barriers of entry due to the nature of an industry
CAPTIAL-INTENSIVE INDUSTRIES
require huge amounts of capital expenditure before a firm receives any revenue
- the cost of entering these markets is huge, so smaller enterprises may not be able to break though
IF INVESTMENTS CAN’T BE RECOVERED
when a firm decides to leave a market, then that may make any attempt to break into a market very risky
IF THERE’S A MINIMUM EFFICIENT SCALE OF PRODUCTION
then any new firms entering the industry on a smaller scale will be operating at a higher point on the average cost curve than established firms
- this means any new entrant has higher production costs per unit, so they’d have to sell at higher prices
Barriers of entry due to government regulations
IF AN ACTIVITY REQUIRES A LICENCE
then this restricts the number and speed of entry of new firms coming into a market
NEW FACTORIES
may need planning permission before they can be built
REGULATIONS REGARDING HEALTH/SAFETY
for employees that firms will need to keep to
Advantages of new entrants
- small firms trying to compete against established ‘gains’
- sometimes they can be large successful companies that wish to diversify into new markets
- their large size means they have greater financial resources, so they may be more successful in breaking into new markets
Pure monopoly?
A market with a single firm with 100% market share
Monopoly power
Firms have monopoly power if they can influence the price of a particular good on their own
= price maker
This is only if there is more than one seller in the market
Monopoly power can occur due to
BARRIERS OF ENTRY
- preventing new competition from entering a market to compete away large profits
ADVERTISING + PRODUCT DIFFERENTIATION
- a girl may be able to act as a price marker if consumers think of its products as more desirable than other produced products
FEW COMPETITORS IN THE MARKET
- if a market is dominated by a small no. of firms, these are likely to have some price-making power.
- they’ll also find it easier to differentiate their products
Factors that influence monopoly power
BARRIERS TO ENTRY
prevent new firms entering the market to share in the monopolist’s profit both in the long and short run
2 types:
NATURAL
includes EOS and indivisibilities
- Economies of scale mean that large firms produce at a lower long-run average cost and are more productively efficient than smaller new entrants
- Indivisibilities prevent certain goods/services being produced in plants below a certain size
ARTIFICIAL
are the result of deliberate actions by existing firms to prevent new firms from entering the market
E.g. limit pricing
