Chapter 5 The Nature of Markets

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Chapter 5 The Nature of Markets

• Gr. 12 Economics

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Chapter Focus

• The four market structures perfect competition,
  monopolistic competition, oligopoly, and
  monopolyand the characteristics of each
• The demand conditions for businesses in each
  market structure
• Nonprice competition through product
  differentiation and advertising
• Industrial concentrationhow it is measured, and
  the arguments for and against it

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Market Structures

• Perfect Competition
• A market structure characterized by many buyers
  and sellers of a standard product and easy entry
  to and exit from the industry
• Many Buyers and Sellers
• Standard Product
• Easy Entry and Exit

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Market Structures

• Monopolistic Competition
• A market structure characterized by many buyers
  and sellers of slightly different products and
  easy entry to, and exit from, the industry
• Oligopoly
• A market structure characterized by only a few
  businesses offering standard or similar products
  and restricted entry to the industry

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Market Structures

• Monopoly
• A market structure characterized by only one
  business supplying a product with no close
  substitutes and restricted entry to the industry
• Entry Barriers
• Economic or institutional obstacles to businesses
  entering an industry

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Types of Entry Barriers

• Economies of Scales
• Natural monopoly a market in which only one
  business is economically viable because of a
  economies of scale
• Market Experience
• Restricted ownership of Resources

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Types of Entry Barriers

• Legal Obstacles
• Market Abuses ?Predatory pricing an unfair
  business practices of temporarily lowering prices
  to drive out competitors in an industry
• Advertising

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Market Power

• Market Power
• A businesss ability to affect the price of the
  product it sells
• Number of Competitors
• Size
• Price Elasticity of Demand

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Demand Differences

• Businesss demand curve
• The demand curve faced by an individual business,
  as opposed to an entire market

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Demand Differences

• Monopolistic Competitor

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• Oligopoly
• Mutual interdependence
• The relationship among oligopolists, in which the
  actions of each business affect the other
  businesses
• Rivalry Among Businesses
• Market share
• A businesss proportion of total market sales

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Demand Differences

• Monopoly

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Nonprice Competition

• Nonprice Competition and the Consumer
• Product differentiation leads to higher prices by
  raising per-unit costs and enhancing an
  individual businesss market power. However,
  consumers will likely have more choices because
  of businesses efforts to differentiate their
  products

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Nonprice Competition

• Nonprice Competition
• Efforts to increase demand through product
  differentiation, advertising, or both
• Product Differentiation
• Efforts to make a product distinct from that
  competitors
• Advertising
• raises prices for consumers
• offer more variety and choice
• raises profits for business

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Industrial Concentration

• Concentration Ratio
• The of total sales revenue in a market earned
  by the largest business

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The Debate Over Industrial Concentration

• Industrial concentration
• Domination of a market by one or a few large
  companies ( 4 firms gt 50 sales revenue)
• Arguments for
• Economies of scale
• Technical innovation
• Arguments against
• Market power (higher price)
• Lack of competition ( poorer quality, less
  innovation)

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Kind of Market Pure Competition Monopolistic Competition Oligopoly (Homogeneous) Oligopoly (Differentiated) Pure Monopoly
Number of producers and type of product Many sellers Identical product Many sellers Some product distinction Few sellers Some product distinction Few sellers Much product distinction One seller No product substitutes
Conditions of entry into industry Easy to enter Easy to enter the Difficult to enter Difficult to enter Very difficult or impossible to enter
Influence over price No control over price Some control over price Limited by interdependence or firms Some control over price Limited by interdependence of firmsprice searcher Considerable control over price price maker
Existence of non-price competition None Someespecially advertising Little use made of advertising Considerable non-price competitionlike advertising Advertising of firms image
Example Stock market Certain agricultural markets Retail trade Clothing Many services industries Steel Aluminium Pulp Cement Automobiles Tires Breakfast cereals Soap Electrical energy Water Gas Urban transit system