CHAPTER 8 Flashcards
Monopoly
One seller of product or service no close substitutes available
Price maker
1 seller
Barriers of entry high
Demand inelastic
Demand curve downward sloping
Market power
Business’s ability to set prices
Price maker
Pure monopoly with maximum power to set prices
Higher prices
Increase total revenue as long as demand is inelastic
Price taker
Business with zero power to set price
Perfect competition
When there is prices taking
Many sellers producing identical products
Many substitutes
Barriers of entry nonexistent
Demand is elastic
Perfect elastic demand in perfect conception
Vertical line on graph
Market structure factors that affect businesses’ power to price
Characteristics that affect competition and pricing power — availability of substitutes, number of competitors, barriers to entry of new competitors
Broad market
More substitutes and competitors
Narrow market
Fewer substitutes and competitors
Product differentiation
Attempt to distinguish product from competitors
Fewer competitors
More pricing power
More competitors
Less pricing power
Barriers to entry
Legal or economic barriers preventing new competitors from entering a market
Patents and copyrights
Exclusive property rights to sell or license creations, protecting against competition
A legal barrier to entry
Average total cost
Total cost per unit of output
When does total average cost decrease
When businesses produce larger quantities of output — economies of scale
Highest pricing power
Businesses with Inelastic demand
Lower pricing power
Businesses with elastic demand
Where do most market exist
In between monopoly and perfect competition
Oligopoly
Few big sellers control most of the market
Price maker much pricing power
Differentiated substitutes
Barriers to entry medium
Demand inelastic
Monopolistic competition
Many small businesses make similar but slightly differentiated products
Price maker — limited pricing power
Differentiated substitutes
Barriers to entry nonexistent
Demand elastic
Competition
Active attempt to increase profits and gain the market power of monopoly
Competitive weapon and gaining market power
Cutting costs — new tech , reduce waste, lower cost raw materials
Improving quality and product innovation
Advertising create brand loyalty can make demand inelastic
Eliminate competition by merging with competitors to reduce substitutes and gain economies of scale
Building barriers to entry
Creative destruction
Competitive business innovations generate economic profits for winners, improve living standards for all, but destroy less productive or less desirable products and production methods
Responsible for the movement of jobs offshore
Schumperer’s theory
When people pay more for insurance than what it’s worth is
Risk averse
