Upgrade to remove ads
Economics #4 and #5
Terms in this set (33)
(very large), simple identical, high, examples: wheat and corn
(many), differentiated, high, examples: selling DVDs and furniture
(few), identical or differentiated, low, examples: computers and automobiles "a state of limited competition, in which a market is shared by a very small number of producers or sellers
(one), unique, entry blocked, examples: first class mail delivery and tap water
a product that regardless of what company furnishes the good, the customers regard the product furnished by all the companies as identical. Most commodities are standardized products. Standardized products are perfect substitutes. Example: soybeans
a process of distinguishing a product or service from others, to make it more attractive to a particular target market. The involves differentiating it from competitors' products as well as a firm's own products. Example: choosing between different mineral water brands. The customer doesn't know the real difference but chooses one anyway.
What is meant by the term "price taker" in market analysis?
Demand to a competitive firm is believed to be horizontal, price is determined by the interaction of market supply and market demand, a competitive firm cannot influence the market by changing its supply
Is perfectly competitive market realistic? If not why should we study the theory of pure competition?
-Generally, in a purely competitive market, there is a large number of small firms producing a standardized or homogenous product
-This means that consumers will have no basic, other than price, for preferring one firm's product over another's and price competition is a norm in this type of market
What is the rule for profit maximization?
states that if a firm chooses to maximize its profits, it must choose that level of output where Marginal cost is equal to Marginal Revenue and the Marginal Cost curve is rising. In other words, it must produce at a level where MC=MR
Economists believe that under perfectly competitive market economic profit approaches zero in the long run, explain:
Resulting in zero economic profit, suggesting that a competitive firm will make enough money to cover all the costs, explicit and implicit. The free entry and exit guarantee this outcome
How can we use the concept of consumer surplus to highlight the advantages of competitive market?
measure the difference between what a consumer is willing to pay for a commodity if the market was not competitive and the amount, he/she actually is paying under competitive condition
What are some of the key advantages of competitive market ?
-Free entry and exit also serves as a continuous threat to the incumbent firms and form them to remain price competitive
-Producers have incentive to be creative and sensitive to the needs of consumers
-Lowest price and availability of choices result in increased consumer welfare
What are some of the key disadvantages of competitive market?
-is based on too many assumptions of which are unrealistic
-Because competitive firms operate on small scale, they fail to exploit economies of scale
-Discussion Issues: Is perfect competition workable? Why do we study perfect competition if it is not practical?
What is a monopoly market?
exists when there is only one seller in a market selling a product with no substitutes, or a single manufacturer of a unique product
What are different types barriers to entry?
Legal, Financial, Informational, Ownership and/or control of the key resources
entry is blocked by Government laws and regulations-patents, copyrights, licensing, chartering, etc.
the high costs of setting up a business initial capital requirement
consumers don't have enough information about the attributes of product therefore they rely on reputation of existing manufacturers, the latecomers do not have that advantage
Ownership and/or control of the key resources
another way for a firm to become a monopoly is by controlling a key resource. This happens rarely because most resources are widely available from a variety of suppliers. However, the classical examples are DeBeer and oil Cos
most world monopolies have limited power, known as partial monopoly-the power of partial monopoly is limited either geographically or from product to products
Existence of substantial economies of scale over an extended range of output create natural monopoly. Also defined as an industry with very high fixed costs and enormous economies of scale over a huge range of output
What are some of the advantages enjoyed by established firm in an industry and their implications?
-allows a company to establish strong brand recognition and product/service loyalty before other entrants
-Establish their products as the industry standard
-Be able to tap into consumers first and make a strong impression, which can lead to brand recognition and brand loyalty
-May be able to control resources, such as basing themselves in a strategic location, establishing a premium contract with key suppliers, or hiring talented employees
-Can gain advantage when there is a high switching cost for consumers to switch to later entrants
-Control of resources
occurs when two businesses in the same, or similar, industry become one. Recent example includes planned merger between Sirius and XM Satellite Radio (announced on 2/19/2007) and Dell and Zink (announced 8/6/07)
involves acquiring a business in the same industry but at different stages of the owning drilling and extraction businesses together with refining, distribution and retail subsidiaries.
What is meant by impediments to entry?
a. Expectations about the possible reaction to the entry by the incumbent firms. The incumbent firms may react by: lowering price to drive new entrants out, accommodating, or no change in price
b. Size of the payoff from a sustained entry
c. Cost of exit arising from liquidation of assets, legal settlement with employees, customers, and other stakeholders.
d. Time it takes to recover the initial capital outlays
What are the restraints on monopoly power and why?
a. Public policy:
· promoting competition and preventing monopoly power by reviewing merger application and AntiTrust Laws
· Breaking monopoly if necessary
· Public ownership
b. Other means of controlling monopoly power:
· High profile antitrust cases. Antitrust laws aimed at eliminating collusion and promoting competition among business firms
· Political pressure, public awareness
· Monopolists have realized that some degree of competition is useful
· Big firms are going global, exposure to international competition
· Technological progress allows substitutes become available
Imperfectly competitive market:
a competitive market situation where there are many sellers, but they are selling heterogeneous (dissimilar) goods as opposed to the perfect competitive market scenario.
Differentiated products are:
essentially the same, however, they are differentiated by altering key features of products or even minor details, it is an important strategy for competing firms to defend their price, market niches, and profit
Key Characteristics of monopolistic competitive market:
-Each firm is medium-sized with limited control over prices
-No rivalry, however, competition is intense
-Competition is usually non-price-base
Key products in differentiation:
-Product design, packaging, shape, color and flavor, brand name
-Location of store where products are sold
-Convenience of shopping: store layout, quality of merchandise they offer
-Terms and conditions of sale, services offered after the sale, technical aspect safety features
Why is non-price competition so popular today?
Is more common in markets where there is imperfect competition, such as those with very few competitors-oligopolies-maybe because it can give an impression of a very competitive market, when in fact the rivals are colluding to keep their prices high
Do you think product differentiation is worthwhile, Explain the costs and the benefits fo product differentiation:
-Monetary costs: costs related to duplicating manufacturing facilities, shipping, marketing, displaying, safe-keeping, and advertising
-Non-monetary costs: waste of economic resources because of operating with excess capacity, waste of resources
Product differentiation strategy creates brand loyalty among customers. The same strategy that gains market share through perceived quality or cost savings may create loyalty from consumers. The company must continue to deliver quality or value to consumers to maintain customer loyalty.
Do you think advertising benefits consumers, if so how?
Advertising helps in increasing the loyalty of existing customers, replacing lost customers and encouraging existing customers to buy more of a company's products or services. Advertising helps to make consumers aware of a product and aims to build preference for that products over its competitors.