Chapter 5- Perfect Competition Flashcards
What is market structure determined by?
- # of businesses in a market
- whether or not a standard product is sold
- ease at which businesses can enter/exit the industry
What are the 4 types of market structure?
- perfect competition
- monopolistic competition
- oligopoly
- monopoly
What is Perfect Competition?
a market structure characterized by many buyers/sellers of a standard product and easy entry/exit from the industry
Describe perfect competition
- ideal form of competition
- has 3 main characteristics
1. many buyers/sellers
2. a standard product
3. easy entry to/from the market - prices of product determined by supply/demand
Describe “many buyers/sellers”
- most important feature of perfect competition
- no single participant is large enough to affect the prevailing price in the industry
Describe “standard product”
- each business supplies an indistinguishable product from other businesses
Describe “easy entry and exit”
- businesses must be free to enter/exit the industry
- farmers can transfer resources from the production of one type of crop to another
What is monopolistic competition?
a market structure characterized by many buyers/sellers of slightly different products and easy entry to enter/exit from the industry
describe monopolistic competition
- most prevalent in the service sector
- characterized by a large # of businesses
- perceptible differences among products of competitors
- easy entry/exit of businesses
What are product differences related to?
location
quality
image consumers have of the product
What is an Oligopoly?
a market structure characterized by only a few businesses offering standard/similar products with a restricted entry to the industry
describe an oligopoly
- extremely common in the cad. economy
- products may or may not vary
- few businesses
- restricted entry to industry
what is a monopoly?
a market structure characterized by only one business supplying a product with no close substitutes and restricted entry to the industry
Describe a monopoly
- exact opposite of perfect competition
- no close substitutes
- single business
- relatively common in Canada
- not always large
What are Entry barriers?
“economic or institutional obstacles to businesses entering an industry”
- required for oligopolies and monopolies
What are the 6 types of entry barriers
- increasing returns to scale
- market experience
- restricted ownership of resources
- legal obstacles
- market abuses
- advertising
Describe increasing returns to scale
- established companies benefit
- small new companies cant charge as low of a price
- in extreme cases a natural monopoly occurs
What is a natural monopoly
a market in which only one business is economically viable b/c of increasing returns to scale
Describe market experience
- can give well-established companies a cost advantage
- can learn how to supply a product more effectively
describe restricted ownership of resources
- when one or a few businesses control supplies of a resource to make a product, they effectively bar new businesses from entering
Describe legal obstacles
- legislation and patents can act as barriers to entry
- patents can make some companies monopolies
- gov’nt licensing can create closed/regulated markets
Describe market abuses
- unfair/illegal practices to maintain a dominant position in industry
- predatory pricing
What is predatory pricing?
unfair advantage of temporarily lowering prides to drive out competitors in the industry
Describe advertising
- most common in oligopolies
- customer preference is dependant on promotion
- established companies with large advertising budgets can often stop small competitors from gaining a significant toehold in these markets
