Chapter 8 | Pricing Power: Monopoly to Competition and In Between

Question 1

Businesses aim for monopoly’s economic profits and price-making power. Competitors usually push businesses toward the normal profits and price taking of perfect competition.

Answer 1

Businesses aim for monopoly’s economic profits and price-making power. Competitors usually push businesses toward the normal profits and price taking of perfect competition.

Question 2

Monopoly

Answer 2

— only seller of a product or service; no close substitutes are available.

– demand curve is steep and inelastic

Question 3

Market power

Answer 3

— business’s ability to set prices.

Question 4

Price maker

Answer 4

— monopoly with maximum power to set prices.

Question 5

Businesses can set any price they choose, but cannot force consumers to buy. Even monopoly price makers must live by law of demand.

Answer 5

Businesses can set any price they choose, but cannot force consumers to buy. Even monopoly price makers must live by law of demand.

Question 6

Perfect competition

Answer 6

— many sellers producing identical products or services.

– demand curve is horizontal and perfectly elastic at the market price

Question 7

Price taker

Answer 7

— business with zero power to set prices.

Question 8

How Much Competition Is Going on? Market Structure

Answer 8

Pricing power depends on the competitiveness of a business’s market structure — available substitutes, number of competitors, barriers to the entry of new competitors — and on elasticity of demand.

Question 9

Market structure

Answer 9

— characteristics that affect competition and a business’s pricing power:
– available substitutes
– number of competitors
– barriers to entry of new competitors

Question 10

Broader definition of market

Answer 10

= more substitutes and competitors = more elastic demand = less pricing power.

Question 11

Narrower definition of market

Answer 11

= more inelastic demand = more pricing power.

Question 12

Product differentiation

Answer 12

— attempt to distinguish product or service from those of competitors:
– allows seller to reduce competition and substitutes and increase pricing power
– can take the form of actual differences or perceived differences

Question 13

Pricing power and number of competitors

Answer 13

– fewer competitors = more price power
– more competitors = less price power

Question 14

Barriers to entry

Answer 14

— legal or economic barriers preventing new competitors from entering a market.

Question 15

Patents and copyrights

Answer 15

are legal barriers — exclusive property rights to sell or license creations, protecting against competition.

– give businesses short-term monopoly power as an incentive for invention, but eventually expire to give consumers reasonably priced products and services

Question 16

Economies of scale

Answer 16

are economic barriers — average total cost of producing decreases as quantity (scale) of production increases.

Question 17

Average Total Cost

Answer 17

= Total cost per unit of output

Question 18

Higher pricing power

Answer 18

= more inelastic demand
– consumers have few substitutes or strong brand loyalty

Question 19

Lower pricing power

Answer 19

= more elastic demand

– consumers have many substitutes or no brand loyalty

Question 20

Oligopoly

Answer 20

— few big sellers control most of the market.

Question 21

Monopolistic competition

Answer 21

— many small businesses make similar but slightly differentiated products or services.

Question 22

n moving across the continuum of market structures from monopoly to perfect competition:

Answer 22

– pricing power moves from price maker to price taker
– available substitutes go from none to many
– number of sellers goes from one to many, many
– entry barriers go from high to low
– elasticity of demand goes from low/inelastic to high/elastic

Question 23

Competition

Answer 23

— active attempt to increase profits and gain the market power of monopoly.

– cutting costs
– improving quality and product innovation
– advertising and brand loyalty
– eliminating competition
– building barriers to entry

Question 24

While a market economy provides extraordinary economic freedom

Answer 24

– to make business decisions, to invest and spend as we please, to choose our occupations — as sellers who depend on markets to earn a living we must play by the market’s competitive rules.

Question 25

Creative destruction

Answer 25

— competitive business innovations generate economic profits for winners, improve living standards for all, but destroy less productive or less desirable products and production methods.

Question 26

Competitive actions by businesses can have the unintended consequence of business cycles

Answer 26

up and down fluctuations of overall economic activity.