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Competitive & Concentrated Markets (Market Structures (Perfect…
Competitive & Concentrated Markets
Market Structures
Market Structure
- The organisation of a market in terms of the number of firms in the market and the ways in which they behave
Price Taker
- A firm which passively accepts the ruling market price set by market conditions outside its control
Price Maker
- A firm possessing the power to set the price within the market
Perfect Competition (Price Takers) <--------------> Monopoly (Price Maker)
Perfect Competition
- A market that displays the six conditions of:
A uniform or homogeneous product
No entry barriers to entry or exit in the long run
The inability of an individual buyer to sell or influence the market price
The ability to buy or sell as much is desired at the ruling market price
Perfect market information
A large number of buyers and sellers
Competitive Market
- A perfectly competitive market is of course a competitive market, but other markets are competitive too. A competitive market is one in which firms strive to outdo their rivals, but it does not necessarily meet all the conditions of perfect competition
Concentrated Market
- A market containing very few firms, in the extreme only one firm
Pure Monopoly
- When there is only one firm in the market
Monopoly Power
- The power of a firm to act as a price maker rather than a price taker
Imperfect Competition
- Any market structure lying between the extremes of perfect competition and pure monopoly
The Objectives of Firms
Profit Maximisation
- Occurs when a firm's total sales revenue is furthest above total costs of production
Sales Maximisation
- Occurs when sales revenues are maximised
Market Share Maximisation
- Occurs when a firm maximises its percentage share of the market in which it sells its product
Competitive Markets
Entry Barrier
- Makes it difficult or impossible for new firms to enter a market
Exit Barrier
- Makes it difficult or impossible for firms to leave a market
Consumer Sovereignty
- Through exercising their spending power, consumers collectively determine what is produced in a market. Consumer sovereignty is strongest in a perfectly competitive market
Producer Sovereignty
- Producers or firms in a market determine what is produced and what prices are charged
Monopoly & Monopoly Power
Sources of Monopoly & Monopoly Power
Natural Monopoly
Natural Monopoly* - The term has two meanings, first when a country or firm has complete control of a natural resource, and second when there is only room in a market for one firm benefiting from economies of scale to the full
Geographical Causes of Monopoly
A pure natural monopoly can occur when, for climatic or geological reasons, a particular country or location is the only source of supply of a raw material or foodstuff
Government-Created Monopoly
Governments sometimes create monopoly, other than in utility industries or natural monopolies, in markets they believe are too important to leave to competition
Patent
- A strategic or man-made barrier to market entry caused by government legislation protecting the right of a firm to be the sole producer of a patented good, unless the firm grants loyalties for other firms to produce the good
Factors which influence monopoly power