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
What is supply
The amount of a good or service that a producer is willing and able to produce over a specified amount of time
Describe movements along a supply curve(3)
Caused by a change in supply
Rise in price causes movement up a supply curve - extension in quantity supplied
Fall in price causes movement down a supply curve - contraction in quantity supplied
What can cause the supply curve to shift(3+4+4+3+3+2+2)
Cost of production
- The higher the costs of production, the lower the profit margins will be
- When costs increase, supply will be fall, as there is less incentive to supply
Tax
- A sum of money that a business has to pay to the government
- Tax acts like an extra cost of production
- If taxes rise, profits fall and supply will decrease
Subsidies
- A sum of money that the government gives to a business. This is usually to encourage the firm to do something that brings external benefits
- An additional source of revenue for the firm
- Increases profit and increases the willingness to supply
Technology
-Better/more technology means new capital
-New capital can increase supply because it makes firms more physically able to
produce more AND because it might make production cheaper, thus increasing profits and willingness to supply
Natural factors
- Primary products will be particularly affected by things such as climate and natural disasters
- Changes in the conditions of supply cause SHIFTS in the supply curve
Productivity
-Higher productivity means a firm can increase the quantity supplied and shifts supply curve to the right
Number of firms in the market
-Higher number of firms in a market will increase overall supply
What is the price elasticity of supply(2)
How responsive supply is to a change in the price of the product
=percentage change in quantity supplied/percentage change in price
What are the 5 possibilities for the price elasticity of supply(2+2+2+2+2)
Perfectly elastic(=infinity) -Any quantity is supplied at a given price
Elastic(>1)
-A % change in price leads to a bigger % change in quantity supplied
Unitary elastic(=1) -Any % change in price leads to an identical % change in quantity supplied.
Inelastic(
What can cause an item’s supply to be more elastic(4)
The production process is short
The firm is currently operating under capacity and has
spare resources to put into extra production
Substitutability of factors of production - if a firm can easily move the factors of production it uses in producing its goods between production lines, it can respond quicker to changes in price - supply will be more elastic
In the long term a firm can alter its scale of production and supply will be more elastic
What can cause an item’s supply to be more inelastic(4)
(opposite of what makes it more elastic)
The production cycle is long
The firm is already operating at full capacity
Substitutability of factors of production - if a firm cannot easily move the factors of production it uses in producing its goods between production lines, it cannot respond quicker to changes in price - supply will be more inelastic
In the short term a firm cannot alter its scale of production and supply will be more inelastic
What determines the equilibrium price
The interaction of demand and supply will determine how much of different products are produced and at what price
Explain the effects of taxes and subsidies on price and quantity in competitive markets
Indirect taxes shifts the supply curve to the left
-price rises and quantity falls
Subsidies shifts the supply curve to the right
-price falls and the quantity rises
Describe maximum price(2)
Market prices are not allowed to go above
Usually below the equilibrium
When is a maximum price used
When the government feels that market prices are too high
Describe the benefits of a maximum price(2)
Keeps prices down so allows more people to have access to the good and services
Stops firms from exploiting consumers with high prices for necessity products
Describe the disadvantages of a maximum price(2)
May make the situation worse.
-At the lower price,
landlords are less likely to provided rented accommodation (supply falls) but more people want it. This creates excess demand (a shortage)
Could lead to unofficial markets(black market) developing
Describe minimum price(2)
Market prices are not allowed to go below
Usually above the equilibrium
When is a minimum price used
When the government is concerned that market prices may go too low
Describe the benefits of a minimum price(3)
Minimum wage avoids exploitation of labour
Minimum price in agriculture ensures that farmers stay
in the market and secures domestic supply of primary
commodities
Minimum prices of demerit goods can reduce the
consumption of goods with external costs (eg alcohol)
Describe the disadvantages of a minimum price(2)
May backfire and price people out of the market.
The higher price will contribute to excess supply
How do you evaluate whether a monopoly is good or bad
How much monopoly power does it have(market share)
-if it has a low percentage (e.g. 30%) there would still be enough competition for lower prices and more choice
