Market Structures Flashcards
market structure
refers to the characteristics and behaviours (or competition) under which a market operates
Market definition
A group of buyers and sellers who come together for the purpose of buying and selling a particular good or service.
Consumers aim to maximize satisfaction derived from consuming a good or service.
Suppliers, on the other hand, aim to maximize profits from the sale of the output they produce.
When is market equilibrium achieved?
Market equilibrium is achieved when there is agreement between consumers and suppliers on the price and quantity of a good or service to be traded.
Market demand curve
Shows the possible quantities of a good or service that all consumers are willing to buy at different prices
When does market disequilibrium occur
Market disequilibrium occurs when the price in the market causes the quantity demanded by consumers to be unequal to the quantity supplied by producers.
This happens when the price in the market is not equal to the equilibrium price.
Surpluses
Otherwise known as excess supply. Occurs when the price in the market is such that quantity supplied by producers exceeds the quantity demanded by consumers.
Shortages excess demand
Occurs where the price in the market is such that the quantity supplied by producers are less than the quantity demanded by consumers
Objectives of government interference with equilibrium prices
- To promote affordability so that consumers are able to purchase essential goods and services (create a price ceiling)
- To increase wages or the price of labour in the labour market (create a price floor)
Government manipulation of supply and price stability
The government can attempt to keep market prices constant or stable by manipulating market supply
- Purchasing and storing if supply is too large (acquiring inventories)
- Selling stocks from storage if supply is too large (depleting inventories)
barriers to entry
Restrictions that prevents other firms from entering an industry/market in the long run
Advantages of Perfect Competition
- Efficient production-An efficient allocation of resources. The firm produces at
the productive optimum (AC= MC). In chapter 13, it was shown that AC is minimised at this point. This implies that resources are being used efficiently. - The price is low-The price charged is low compared to other types of market
structure, which means that consumer welfare is maximised. - No advertising-Producers do-not have to spend money or time on advertising
or other forms of sales promotion. This is because all firms produce identical
products and sell them at the market price. These costs are therefore saved. - Consumer sovereignty- Consumer demand or willingness to pay for various
products sends a signal to firms to produce certain goods. This means consumers determine what goods and services are to be produced. This is referred to as consumer sovereignty.
Advantages of Monopoly
- Economies of scale-Being the sole producer, the firm is usually a large one
and the firm can therefore enjoy economies of scale with lower cost. - New technology- A monopoly can also afford to purchase the-latest and most
sophisticated technology. With the latest machinery, the monopoly firm is able to
use production inputs more efficiently. - Research and development - The firm can undertake research-and development to stimulate innovation and invention. The monopoly may find it worthwhile to
spend money on research and development to develop better products.
Disadvantages of Monopoly
-
Higher Price-A monopoly firm usually charges a higher price. As the monopoly
firm is the only producer of the good, he charges a higher price than it would
be ifit were determined by demand and supply. The monopolist could also
limit the supply of the good so that consumers would be willing to pay a
higher price to get the good.
The firm does not produce at the productive optimum point. In figure 15-6,
the monopoly firm produces QE level of output, which is below Qo level. This
means that cost of production is not minimised.
There is absence of consumer sovereignty-The consumers have to buy whatever goods and services are produced by the monopoly firm as they have no other options to choose from.
There is greater inequality of income-A monopoly can earn excessive profits by charging a high price for its goods and services. This could cause a greater inequality of income within the economy
Ways to Control Monopoly
**Nationalisation- **sometimes, when a private firm gets too large or too powerful, the
government takes over, nationalises it and turns it into a state-owned entity that
does not aim to maximise profits.
Setting up a maximum price (price ceiling)-
Imposing taxes-The government can impose taxes on the monopoly to prevent it from becoming too profitable
Barriers to Entry
examples
**Patents, licences and copyrights (legal barriers to entry) **
Production secrets- If the production of a good involves a secret ingredient or a secret recipe, then this would effectively prevent other firms from producing this good. In Trinidad, Angostura bitters is one product which is produced by a secret recipe and no other manufacturer can produce this good
PREDATORY PRICING- This refers to aggressive price cutting by existing firms so that no new firm will be able to compete with such low prices.
Control over raw materials- The exclusive ownership or control of a substantial amount of an essential raw material would considerably limit attempts by other firms to enter an industry. Without the availability of these raw materials, rival
firms would not be able to enter the industry.
