economics
- Created by: katier1234
- Created on: 16-11-19 19:27
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- Competitive and Concentrated Markets
- Key Terms
- 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 accept 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- A hypothetical market where competition is at its greatest level
- Competitive Market- one in which firms strive to outdo their rivals but doesn't necessarily meet all their conditions of perfect competition
- Concentrated Market- A market containing only a few firms
- Pure Monopoly- Only one firm in the market
- Monopoly Power- The power of a firm to act as a price maker rather than price taker
- Imperfect competition- Any market structure lying between the extremes of perfect competition and pure monopoly
- Consumer sovereignty- Consumers collectively determine what is produced in a market through their spending power. exists in competitive markets
- Producer sovereignty- Producers determine what is produced what is produced and what price is charged. exists in highly concentrated or monopoly markets
- Productively inefficient- monopoly- producing over their costs
- Features of a Market
- Number of firms in the market
- Market share of the largest firms
- The nature of the production costs in the short and long term e.g the ability to exploit economies of scale
- The extent of product differentiation
- The price and cross elasticity of demand for different products
- The number and the power of the buyers of the industry's main products
- The turnover of customers- measure of how often customers switch suppliers
- Perfect Competiton
- Many small firms- each of whom produces a low percentage of market output and thus exercises no control over the ruling price
- Many individuals buyers- none of whom has any control over the market price
- Perfect Knowledge- consumers have readily available information about prices and products from competing suppliers
- Homogenous product- all products are the same- perfect substitute ( oil and petrol)
- Freedom of enterance to exit from the industry- No sunk costs- this means that long run profits will be normal as any super normal profits will be competed away
- Readily available information- we assume all firms have equal access to technological improvements.
- Perfect competition is actually non- existent in the real world
- Price determination in a perfectly competitive market
- Perfect competition have no influence over the market they are price takers
- The price is determined by the interaction of the supply and demand curves in the industry
- Why are profits likely to be lower in a competitive market?
- In a highly competitive market they are normally very few entry and exit barriers
- If high levels of profit is being made in the short run then this will send signals to other firms to enter the industry to reap some of the rewards
- As there are no barriers to entry or barriers to exit they will do so until all the super normal level of profit are competed away
- The invisible hand of the market acts as a mechanism for eliminating high profits through signals and incentives
- Key Terms
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