4 - Competitive + Concentrated Markets

Question 1

Market structures?

Answer 1

No. of firms in a market and the ways in which they behave

Question 2

Price taker?

Answer 2

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

Question 3

Price maker?

Answer 3

A firm possessing the power to set the price within the market

(Usually monopolists)

Question 4

Perfection competition is a form of marker structure that requires 6 conditions to hold:

Answer 4

• 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

Question 5

It leads to allocative efficiency

Answer 5

(Ask ejaz)

Question 6

It leads to productive efficiency

Answer 6

(Ask ejaz)

Question 7

Concentrated markets

Answer 7

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

Question 8

Imperfect competition

Answer 8

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

Question 9

Objectives of firms

Answer 9

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

Question 10

Other possible business objectives

Answer 10

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

Question 11

Price determination in a competitive market

Answer 11

(Pictures on pg 78-79)

Question 12

Barriers to entry

Answer 12

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

Question 13

It varies between markets

Answer 13

Perfectly competitive markets

• NO BARRIERS at all

Pure monopoly market

• Barriers is entry are TOTAL
• No new firms can enter

Question 14

Barriers to entry due to incumbent firms’ actions

Answer 14

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

Question 15

Barriers of entry due to the nature of an industry

Answer 15

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

Question 16

Barriers of entry due to government regulations

Answer 16

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

Question 17

Advantages of new entrants

Answer 17

• 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

Question 18

Pure monopoly?

Answer 18

A market with a single firm with 100% market share

Question 19

Monopoly power

Answer 19

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

Question 20

Monopoly power can occur due to

Answer 20

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

Question 21

Factors that influence monopoly power

Answer 21

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