Chap 23 Flashcards
Define Market Structure
the conditions which exist in a market including the number of firms
Define Competitive market
A market with a number of firms that compete with each other
Characteristics of a competitive market
The more competition there is, the more sellers and buyers there are
Each firm has a small share of the market/ small amount of the total market supply
Change in output of one firm has no effect on price
Relatively free entry & exit from the market
Define normal profit
The minimum level of profit required to keep a firm in the industry in the long run
Define Supernormal profit
Profit above that needed to keep a firm in the market in the long run
Behaviour of competitive markets when demand rises (/fall)
When demand rises; supernormal profit
This attracts more firms into joining the market
; Supply increases and prices lower
So the supernormal profit becomes normal
How do competitive firms promote efficiency?
Whichever firm responds quickly to change in demands gain a competitive advantage and earn higher profits
The threat arises because any inefficient firm that produces at a high cost will be driven out of the market.
Define Monopoly
A market with a single supplier
How do governments define a Monopoly/ Pure Monopoly/ Dominant Monopoly
Monopoly: 25% or more share
Dominant Monopoly: 40% share
Pure Monopoly: 100% share
Characteristics of a monopoly
• The firm is the industry ( 100% share of the market )
• High barriers to entry and exit
• Price maker- Its output is the industry’s output and so changes in its supply affect the market price
Why do monopolies arise?
- May develop over time (driven out rival firms and captured the whole of the market)
- Mergers and takeovers
- May exist from the start ( May own everything/ granted monopolistic powers by a government, which makes it illegal for other firms to enter the market )
Define Barrier to entry
anything that makes it difficult for a firm to start producing the product.
Define Barrier to exit:
anything that makes it difficult for a firm to stop making the product.
Why do monopolies continue?
Existence of barriers to entry and exit
Types of barrier of entry
- Legal barrier (in the form of a patent or a government act)
- Scale of production ( Large scale= low unit cost/ New firm= higher unit costs)
- Expensive to set up a new firm (if large capital equipment is required)
- Creation of brand loyalty through branding and advertising
- Monopoly’s access to resources and retail outlets.
Types of barriers of exit
- Long-term contract to provide a product- reluctant to undertake such a commitment
- Existence of sunk costs- advertising, industry-specific equipment
Define Sunk costs
Cost that cannot be recovered if the firm leaves the industry.
Define Scale of production
the size of production units and the methods of production used
The behaviour of a monopoly
The existence of barriers to entry, means that a monopoly can earn supernormal profits in the long run.
They can set the price, but then it has to accept the level of sales that consumers are prepared to buy at that price.
Disadvantages of a monopoly:
- Absence of competition may lead to inefficiency
- May restrict the supply to push up prices and may produce a poor quality product, knowing that consumers cannot switch to rival products.
- Fail to respond to changes in consumer tastes and develop new products
Advantages of a monopoly:
- Large scale production= lower unit cost and prices
- Prevents the wasteful duplication of capital equipment
- High profits enables it to spend on research and development
- Need to overcome barriers to entry and break the monopoly may encourage firms outside the industry to try and develop a better product.
Advantages of a competitive market
- Promote efficiency
- Keep prices low and quality high
Disadvantages of a competitive market
- Low-scale production = prices are not as low as possible
- Lack of choice of types of products
