Costs, revenues and profits

Market structure

two firms
smallfirmswith cokelarge e.g
andpepsi.airous
producedifferentiation andbowingand
e g indian restaurants appleandsamsung no
highly
monopolistic duopoly
competition
competitive Oligopoly monopoly competition
few largefirms one firme.g
perfect supermarketse.g
Thameswater
competition
andcoffee
manysmallfirms
sellingthesame
productegfruit
andvegmarket
Perfect competition
• theoretical market structure
• Fruit and veg market near perfect competition

Characteristics;
• no barriers to entry or exit the market
• Very larger number of buyers and sellers
• Homogenous goods (identical)
• Perfect knowledge for both consumers and producers

Many buyers and sellers

• neither the buyer or seller has enough power to in uence the market forces (S&D
set prices)
• Many buyers and sellers
• Each rm is relatively small
• All price takers (can’t in uence the price)
• If price rises people will go to another supplier
• Firms demand is perfectly elastic
p

P D

QD
• Can sell all of its output at current market price
• Highly competitive
• If a change in increased demand e.g. trends = increased pro ts. New rms then
enter the market = increased supply therefore decreased price
• Most rms make a normal pro t (0 pro ts)
Homogenous products
• identical to each other e.g. apples
• Firms can try and change this, but increases cost from advertising and marketing

Perfect knowledge
• assume consumers know exactly how much each rm is charging
• Assume all rms have knowledge of other rms prices + costs
• nearly perfect knowledge due to the internet

However in reality there are always barriers to entry and non-homogenous

Barriers to entry
Factors that can stop a rm from entering and exiting the market:
• high start up costs (machinery)
• Legal reasons (pattens, laws, regulations, Royal Mail)
• Access to land and resources
• Lack of knowledge/ experience
• Larger rms bene t from economies of scale
• Access to nance (banks won’t provide loans as too high risk)
• Brand loyalty (won’t swap from coke to Pepsi)

Barriers in the banking sector

Regulatory barriers - legal requirements, high capital requirements
Implementing IT systems - large sink costs (costs which can’t be recovered if the rm
leaves the market)
Marketing and branding - large sink costs in marketing to establish a banking brand
Distribution barriers - branch net work needed to reach customers

Monopoly
• high capital costs
• Supply chain control/ distribution net works
• Excess of scarce resources
• Legal (patents)
• Economies of scale
• Predatory pricing
• Marketing and branding
• Sink costs (Cant be returned on exit)
• Subsides/ regulatory obligations stop exiting

Pure monopoly - a single supplier that constitutes the entire industry (or market) e.g.
Royal Mail and Thames water and the underground

Legal monopoly - a rm that has more than 25% market share e.g. Tesco’s, Microsoft,
google
 more Less
competitive competitive

perfect monopoly
competition

Concentration ratio - measures the percentage of output or sales of the largest rms in a
given industry (usually top 4)

perfect monopolistic oligopoly monopoly

competition competition

0 low concentration 50 medium 80 100

concentration high
concentration