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Please note that these slides only summarize key points discussed under the topic on Market Structures. You are expected to supplement your review for finals using your own notes taken from lectures I conducted during classes. I wish you all the best in your review!
Types of Business Organizations • • • • Sole proprietorships Partnerships Corporations Cooperative associations .
Imputed and Opportunity Costs • Imputed cost – a value assigned to any cost item that is not recorded in the books • Opportunity cost – the gains in allocating these resources to uses other than in the business in question .
Pure Competition Characteristics: Large number of firms Products are homogenous (identical) – consumer has no reason to express a preference for any firm Freedom of entry and exit into and out of the industry Firms are price takers – have no control over the price they charge for their product Each producer supplies a very small proportion of total industry output .
Perfect Competition One extreme of the market structure spectrum Characteristics: Large number of firms Products are homogenous (identical) – consumer has no reason to express a preference for any firm Freedom of entry and exit into and out of the industry Firms are price takers – have no control over the price they charge for their product Each producer supplies a very small proportion of total industry output Consumers and producers have perfect knowledge about the market .
Efficient Allocation of Resources • Firms would be forced to produce goods which consumers want most • Prices charged will be reasonable to both producers and consumers • Firms are forced to use the most efficient. least-cost methods • Firms cannot afford to produce goods of inferior quality .
Monopolistic or Imperfect Competition Characteristics: Large number of firms in the industry May have some element of control over price due to the fact that they are able to differentiate their product in some way from their rivals – products are therefore close. substitutes Entry and exit from the industry is relatively easy – few barriers to entry and exit . but not perfect.
• Each firm produces a differentiated product. • Firms compete on product quality.WHAT IS MONOPOLISTIC COMPETITION? Monopolistic competition is a market structure in which: • A large number of independent firms compete. • Firms are free to enter and exit. . and marketing. price.
the market has a large number of firms. Three implications are: Small market share No market dominance Collusion impossible .WHAT IS MONOPOLISTIC COMPETITION? Large Number of Firms Like perfect competition.
the quantity demanded of that firm’s product decreases. A differentiated product has close substitutes but it does not have perfect substitutes. .WHAT IS MONOPOLISTIC COMPETITION? Product Differentation Product differentiation Making a product that is slightly different from the products of competing firms. When the price of one firm’s product rises.
Price. reliability. ease of access to the product. Marketing Advertising and packaging .WHAT IS MONOPOLISTIC COMPETITION? Competing on Quality. and Marketing Quality Design. service. Price A downward sloping demand curve.
. A firm cannot make economic profit in the long run.WHAT IS MONOPOLISTIC COMPETITION? Entry and Exit No barriers to entry.
WHAT IS MONOPOLISTIC COMPETITION? Identifying Monopolistic Competition Two indexes: • The four-firm concentration ratio • The Herfindahl-Hirschman Index .
• Natural or legal barriers prevent the entry of new firms. .WHAT IS OLIGOPOLY? Another market type that stands between perfect competition and monopoly. Oligopoly is a market type in which: • A small number of firms compete.
• Each firm has a large market share • The firms are interdependent • The firms have an incentive to collude .WHAT IS OLIGOPOLY? Small Number of Firms In contrast to monopolistic competition and perfect competition. an oligopoly consists of a small number of firms.
they are interdependent in the sense that the profit earned by each firm depends on the firms own actions and on the actions of the other firms. Before making a decision. .WHAT IS OLIGOPOLY? Interdependence When a small number of firms compete in a market. each firm must consider how the other firms will react to its decision and influence its profit.
. A cartel is a group of firms acting together to limit output. and increase economic profit. Cartels are illegal but they do operate in some markets. raise price. Despite the temptation to collude. they can increase their profit by forming a cartel and acting like a monopoly. cartels tend to collapse.WHAT IS OLIGOPOLY? Temptation to Collude When a small number of firms share a market.
Natural barriers arise from the combination of the demand for a product and economies of scale in producing it. .WHAT IS OLIGOPOLY? Barriers to Entry Either natural or legal barriers to entry can create an oligopoly. there is a natural oligopoly. If the demand for a product limits to a small number the firms that can earn an economic profit.
GAME THEORY Game theory The tool used to analyze strategic behavior— behavior that recognizes mutual interdependence and takes account of the expected behavior of others. .
. even when it would be beneficial to both players to do so.GAME THEORY What Is a Game? All games involve three features: • Rules • Strategies • Payoffs Prisoners’ dilemma A game between two prisoners that shows why it is hard to cooperate.
.GAME THEORY Nash equilibrium An equilibrium in which each player takes the best possible action given the action of the other player.
Monopoly Monopoly power – refers to cases where firms influence the market in some way through their behaviour – determined by the degree of concentration in the industry Influencing prices Influencing output Erecting barriers to entry Pricing strategies to prevent or stifle competition May not pursue profit maximisation – encourages unwanted entrants to the market Sometimes seen as a case of market failure .
A monopoly is the sole supplier of a product with no close substitutes The most important characteristic of a monopolized market is barriers to entry new firms cannot profitably enter the market Barriers to entry are restrictions on the entry of new firms into an industry Legal restrictions Economies of scale Control of an essential resource 24 .
a single firm can sometimes supply market demand at a lower average cost per unit than could two or more firms at smaller rates of output 25 .Economies of Scale A monopoly sometimes emerges naturally when a firm experiences economies of scale as reflected by the downwardsloping. long-run average cost curve In these situations.
Price Discrimination A monopolist can sometimes increase economic profit by charging higher prices to customers who value the product more The practice of charging difference prices to different customers when the price differences are not justified by differences in cost is called price discrimination 26 .
at little cost.Conditions Conditions for Price Discrimination The demand curve for the firm’s product must slope downward the firm has some market power and control over price There are at least two groups of consumers for the product. each with a different price elasticity of demand The producer must be able. to charge each group a different price for essentially the same product The producer must be able to prevent those who pay the lower price from reselling the product to those who pay the higher price 27 .
Examples of Price Discrimination Because businesspeople face unpredictable yet urgent demands for travel and communication. businesspeople are less sensitive to price than householders Telephone companies are able to sort out their customers by charging different rates based on the time of day 28 . and because employers pay such expenses.
the firm’s marginal revenue curve from selling one more unit would equal the price of that unit the demand curve would become the marginal revenue curve A perfectly discriminating monopolist charges a different price for each unit of the good 29 .Perfect Price Discrimination If a monopolist could charge a different price for each unit sold.