Chapter 5 - How Markets Work?

Question 1

Explain how prices are set in a market

Answer 1

In a market, prices are set by buyers and sellers, negotiating. Sellers hoping to maximize the revenue that they get increase the price as much as they reasonably can. Shoppers, hoping to get a ‘‘deal’’ will attempt to pay as little as they can. Price setting happens in markets every time a buyer meets a seller.

Question 2

Identify 4 types of market. How are they distinguishable?

Answer 2

1. Perfectly competitive market
2. Oligopoly market
3. Monopoly market
4. Monopolistically competitive market

By the number of sellers

Question 3

What is an economic system?

Answer 3

The means by which a country organizes the production and distribution of goods and services its people need

Question 4

No two countries have an identical economic system. Why?

Answer 4

Due to different histories, different cultures, different customs and traditions and different politics.

Question 5

What are the 2 broad categories of economic systems. Explain why the 1st one is called what it is called.

Answer 5

Market economies
Planned economies
In planned economies, the goods and services that get produced , and how they are distributed, is determined by political leaders and government officials according to a plan

Question 6

What is a market? Give examples.

Answer 6

A market is not a place. A market is an accumulation of interactions. People wanting to buy something, exchange information, and negotiate with people wanting to sell something.
Example: internet, housing markets

Question 7

Are all markets the same?

Answer 7

If they are a lot of potential buyers in a market, and lots of sellers, everyone can shop around, collect lots of information and exercise some choice. Some markets do have lots of buyers and lots
of sellers. But some other markets have very few buyers, or
very few sellers. As the number of sellers decreases, would be buyers have less opportunity to shop around, less ability to negotiate, and ultimately less chance of making purchases on
terms that are to their advantage.

Question 8

Perfect competition

Answer 8

A market with many sellers.
With a large number of sellers, buyers have maximum choice and ample ability to shop around, or
find a “better deal”.

Question 9

Oligopoly

Answer 9

This is a market with only a small number
of large sellers. In this type of market buyers have
only limited choice and limited ability to shop around.

Question 10

Monopoly

Answer 10

A market with only one seller. Buyers
have no choice but to buy from the sole supplier or
de without. Thus, all transactions are done on the
seller’s terns

Question 11

Monopolistic competition

Answer 11

A market that has

elements of perfect competition, oligopoly, and monopoly

Question 12

How does a market function?

Answer 12

1. A would-be consumer, in search of a product or service, searches for one or more vendors;
2. A vendor, in search of a sale, tries to highlight the features and benefits of his product
3. Information is exchanged between consumer and vendor
4. Prices are negotiated
   And finally
5. A sale is completed — or not.

Question 13

What advantages the market system have?

Answer 13

• entrepreneurs are permitted — indeed encouraged — to start a business.
• consumers are able to have some choice between alternate suppliers
• sellers are entitled to seek a profit
• when buyers and sellers agree, both parties get what they want.

Question 14

An entrepreneur must have a

very clear as to….

Answer 14

• who its potential customers are,
• what products or services chose potential customers
  want
• why they want them.
  In other words, a business must be able ta identify its target market.

Question 15

Demand for any product will vary according to…

Answer 15

• age,
• gender,
• ethnicity,
• socio-economic status
• geographic location

Question 16

What are the key elements of a perfectly competitive market?

Answer 16

• As the consumer, feel that you have a great deal of choice as to from whom you purchase what you need.
• All the sellers are said yo be “small”.
• In this case “small”
  means that he producer enjoys a large market share.
• Market share can be measured either in value terms or in volume terms
• All vendors charge “more or less” the same price.

Question 17

What are some barriers to entry?

Answer 17

• Few competitors have developed processes or technologies that have dramatically lower their costs
• Another barrier to entry is scale. Example: It is remarkably expensive
  and difficult to build a trans-continental pipeline, or to put a
  bank branch into every city and town in the country.
• Only those that can produce the product on a very large scale will reduce their costs, relative to those who cannot (economies of scale)

Question 18

What are the key elements of oligopolies?

Answer 18

• Contain barriers of entry
• Tend to be capital intensive or labor intensive
• Oligopoly firms are usually described as “large”. By definition, if the number of competitors in an industry
  is small, each enjoys a large market share.
• If the technology required to compete is complex and expensive,
  the business requires a large amount of capital.
• If scale is necessary to compete effectively, oligopoly businesses will have a large number of stores, a large number of branches, or a large number of employees.
• These characteristics (size, capital intensity, labor intensity) mean that once a business in an oligopoly is
  up and running. it is hard for it to shut down
• Because of their
  keen awareness of each other, and their intense rivalry, firms in an oligopoly will tend to set similar prices.

Question 19

Why might a monopoly exist?

Answer 19

• A business has discovered a new or highly-specialized technology that no rival can duplicate
• A business has bought up exclusive control of all of the raw materials, parts or supplies needed
  to produce a product
• A business is so much more efficient and cost effective at producing a product that no rival can
  effectively compete.
• A natural monopoly is a business that, for reasons of size, greater efficiency or exclusive access to resources or technologies, will
  always be cheaper than any rival
  Ex: NFL, NBA, NHL

Question 20

Why do legislated monopolies exist? Examples.

Answer 20

Legislated monopolies exist because, despite society’s general preference far competition and consumer
choice, governments recognize that there are some industries which, because of high barriers to entry,
could not efficiently deliver products or services at low cost, unless one big supplier was given exclusivity.
- Examples: utilities: the suppliers of electricity,
gas, water and (as we have seen from the examples above) telephone and cable TW services.

Question 21

What is the purpose of the game Monopoly?

Answer 21

“Monpoly”
is to acquire more and more real estate until, at the end of the game there is only one
landowner in the city. The rules of “Monopoly”
(the board game) dictate that the more land
you own, the more houses and apartments you
can build, and therefore the more rent that you
can charge, The owner of all four railway companies can charge four times as much rent as
the individual railways can, because the owner
lacks any competition.

Question 22

How does monopolistic competition emulate the characteristics of a “perfectly” competitive market

Answer 22

Similar to a “perfectly” competitive market, a monopolistically competitive market is characterized, first,
by lots and lots of sellers and most of the (many) suppliers are “small”. In a monopolistically competitive industry a small number of the sellers (perhaps 4 or 5) are
much larger than the rest.
Ex: coffee shops (Starbucks and Tim Horton’s), hamburger restaurants (McDonald’s, Wendy’s, Burger King) and sports clothing (Nike, Adidas and Ralph Lauren)

Question 23

Market structures - Note of Caution

Answer 23

It is the availability of choice, and the opportunity to shop around, that determines the amount of competition that exists in any market at any moment in time. The availability of choice can change from time
to time and from circumstance to circumstance.
- Example: a service that appears to be available in a perfectly competitive market
(lots of plumbers)
becomes an oligopoly (only 3 plumbers claim to offer 24/7 emergency service) and ends up as a monopoly
{you are forced to deal with the sole, unpleasant and unfriendly provider.)

Question 24

Perfect Competition: Features + Examples

Answer 24

• Large number of sellers
• No “barriers to entry”
• All sellers have small market share
• All sellers more: or less the same
• Products are not differentiated
• All sellers charge (more or less) the same
  Examples:
• Cartons of milk
• Newspaper vendors
• Fruits and vegetables

Question 25

Oligopoly: Features + Examples

Answer 25

• Small number of sellers
• Only one seller
  Barriers to entry
• The few sellers are “large”
• Sellers very aware of each other, match prices
• Competitors differentiate through branding
  Examples:
• Airlines
• Banking (RBC, BMO, TD, Scotia, CIBC)
• Cell phone services (Bell, TELUS, Rogers)

Question 26

Monopolistic Competition: Features + Examples

Answer 26

• Large number of buyers
• Large number of sellers
• No “barriers to entry”
• Most of the sellers are “small”
• A few sellers are “large” and better-known
• Larger sellers can differentiate
• Differences highlighted through “branding”
• Most sellers charge (more or less) the same
• Larger, “branded” sellers can charge more.
  Examples:
• Coffee shops (Starbucks vs. the rest)
• Hamburgers (McDonalds vs. the rest
• Sports clothes (Mike vs. the rest}
• Laptops (Apple vs. the rest)

Question 27

Monopoly: Features + Examples

Answer 27

• Barriers to entry (natural or legislated)
• Consumers have NO choice
  Examples:
• Many utilities (electricity, gas, water supply)
• LCBO

Question 28

What is a market?

Answer 28

The interaction of buyers and sellers, exchanging information about produces and services for sale.