Micro - What are competitive markets Flashcards
Define competitive market
A market situation in which there are a large number of produceers competing with each other to satisfy the wants and needs of a large number of consumers
Describe the causes of monopoly power(2+8)
Internal or external expansions(merges and takeovers)
High barriers to entry
- Ownership of raw materials - One firm owns all the resources needed to make a particular product, preventing other firms from entering the market
- Legal barriers to entry - There are legal things in place that give one firm monopoly power. This may include patents, statutes and copyright
- Marketing barriers to entry - One firm has a lot of marketing and advertising resources. They use these to create such a strong brand image and identity, that it makes it very difficult for a new firm to break in
- Technical barriers to entry - The existing firm is very large and benefits from economies of scale. New firms, operating at much lower outputs, know that they will not be able to produce at such low costs and prices
Describe the benefits of a competitive market(4+2+2)
For consumers:
- Prices will be low
- There will be more choice
- Quality may be improved
- There may be more innovation and new products as firms try and stay ahead of competitors
For firms:
- It may be easier to attract workers as there are lots of workers doing similar jobs.
- This high supply of labour may keep wages down
For the economy:
- Competition encourages firms to be more efficient and to keep their average costs as low as possible because prices will be lower.
- Firms are likely to make more careful/efficient use of scarce resources
Describe the costs of a competitive market(4)
For firms:
- Prices are likely to be driven much lower than in less competitive markets- this may reduce profit margins
- Lower profit margins may mean that there are less funds available for reinvestment
- There is a constant pressure to cut costs and be efficient. This means that firms have to spend a lot of time managing resources and ensuring labour productivity is as high as possible. This could cause conflict
- They may lose workers to competitors if competitors offer better wages/working conditions/training etc
Describe the benefits of a monopoly(2+5+1)
To Consumers:
- Firms are large and may benefit from economies of scale. Firms MAY chooce to pass on the benefits of this to consumers in the form of lower prices
- Product quality and range may be higher than in competitive markets. This is because (a) The monopolies have the profits to re-invest in the business and in product development and (b) They have the incentive to do so because they want to maintain their monopoly power and keep barriers to entry as high as possible
To the Firm
- Prices are likely to be more price inelastic. This means that they can keep prices higher
- The lack of competition means higher prices and hence higher profit margins
- The lack of competition means that the monopoly does not need to be as careful about minimising costs
- The monopoly does not have to spend as many resources on advertising and marketing
- The financial position of the monopoly will be quite stable, this may attract more investors/finance
To the Economy
-Economic resources are focused on production and not on marketing/advertising
Describe the costs of a monopoly(3+1+2)
To Consumers
- Less competition is likely to mean higher prices
- There will be less choice
- Product quality/customer service may decline because the monopoly has a captured market (especially if it is a natural monopoly)
To the Firm
-The lack of competitive pressures may make the firm become stale and unresponsive to consumer demand. If the product is not a necessity, consumers may move away from the product over time
To the Economy
- The lack of incentive to be efficient may mean that scarce resources are not being used as well as they would be under a competitive market. The output of goods and services may be lower than in a competitive market
- The lack of competitive forces may mean that scarce resources are not being used to respond to consumer demand and to make the goods and services that consumers most want/value
How can governments promote competition and prevents monopolies and evaluate these methods(5+3+5)
Ban all monopolies
- Firms are not allowed to own more than 25% of market share
- Removes the disadvantages of monopolies
- There is no incentive for firms to be efficient, innovate, get better
- Loses the potential gains of monopolies
The government helps to break down barriers to entry
- Removal of barriers to entry, naturally encourages competitive forces
- It is very difficult to do this in some industries where there are very high natural and technical barriers to entry. It is easier to do it when the main barrier to entry is legal
Regulation of Monopolies
- A regulator is put in place to ensure that they do not exploit the consumer and are run efficiently
- Potentially allows us to keep the benefits of monopoly without having the costs
- Regulators may be expensive and bureaucratic
- Regulatory Capture - sometimes over time the regulators become “taken in” by the industry and stop looking at it objectively
Explain what is meant by demand
The amount of a good or service that a consumer is willing and able to buy over a specified period of time
Describe movements along a demand curve(3)
Caused by a change in price
Rise in price causes movement up a demand curve - contraction in quantity demanded
Fall in price causes movement down a demand curve - extension in quantity demanded
What can cause the demand curve to shift(4+2+2+2+2+2+2)
Income
- changes the real spending power
- For NORMAL goods, a rise in income will lead to a rise in demand since more can afford it
- For INFERIOR goods, a rise in income will lead to a fall in demand since people would rather buy the normal good
Price of substitutes
-A rise in the price of a substitute, may lead to a rise in the demand for our good as the demand for the substitute falls
Price of complementary goods
-A rise in the price of a complimentary good may lead to fall in the demand for our good
Taste and fashion
-If a good is more popular the demand will increase
Advertising
-Good advertising will cause the demand for the good to increase
The size of the population
-Larger size means higher demand
Interest rates
-Higher interest rates makes it more rewarding to save and more expensive to borrow, causing demand curve to shift to the left
What is the price elasticity of demand(2)
How responsive quantity demand is to a change in the price of the product
=percentage change in quantity demanded/percentage change in price(ignore negative sign)
What are the 5 possibilities for the price elasticity of demand(2+2+2+2+2)
Perfectly elastic(=infinity) -Any quantity is demanded at a given price
Elastic(>1)
-A % change in price leads to a bigger % change in quantity demanded
Unit elastic(=1) -Any % change in price leads to an identical % change in quantity demanded.
Inelastic(
How can the PED be used(4)
Informing pricing decisions
- If a product has price elastic demand, a firm can increase TOTAL REVENUE by putting prices DOWN.
- If a product has price inelastic demand, a firm can increase TOTAL REVENUE by putting prices UP
- If there is unitary elasticity of demand, changing price has no effect on TOTAL REVENUE and so is pointless
What can cause an item’s demand to be more elastic(5)
There are lots of substitutes
The good is a luxury
The good takes up a high proportion of your income
The good is durable (lasts a long time)
The good is heavily branded and has a lot of brand loyalty
What can cause an item’s demand to be more inelastic(5)
(opposite to what makes it more elastic)
There are few substitutes
The good is a necessity
The good takes up a small proportion of your income
The good is consumable (gets used up)
The good is not branded
