Edexcel Economics Unit 2b Topic 2

market structures

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Perfect Competition

The most competitive market structure

  • Where no buyer or seller can influence the price
  • Free flow of market information
  • Only a theory
  • Every participant is a price taker


  • Infinite buyers and sellers
  • No barriers to entry
  • Perfect information
  • Zero transaction costs
  • Homogenous products
  • No abnormal profits made
  • Example: commodities/currency
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Imperfect Competition

Covers any market situation between perfect competition and monopoly

  • Many firms
  • Little market power
  • Highly price elastic
  • Non-homogenous goods
  • Needs to be efficient
  • Could be a price setter

Monopolistic competition:

  • describes a market with many sellers, easy entry and exit and product differentiation. Competition is likely to be stiff
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Oligopoly is where one market is dominated by a small number of participants who have market power

  • There are few sellers, each oligopolist is likely to be aware of the others. 
  • Example: The Supermarket Industry


  • Entry and exit barriers
  • Small number of firms
  • High profits
  • Product differentiation
  • profit maximisation
  • Collusion is a agreement between two or more firms to limit open competition
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  • Working Monopoly: A market in which one firm has 25% market share or more.
  • Pure Monopoly: Situation where there is only one supplier, who has 100% of the market share
  • Natural Monopoly: Scale and fixed costs make it impractical to have more than one supplier.
  • Monopoly: is the ability to charge high prices because you are the only supplier of a product.
  • Very high barriers to entry: High start up costs, patents, brand loyalty
  • High profit levels
  • Price inelastic
  • No alternatives
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Competitive markets, prices and costs

  • Homogenous products are identical to one another, and is impossible to distinguish one producer's output from another.
  • Normal profits are just sufficient to keep the producer in the market.
  • Price takers: are businesses with undifferentiated products that face high price elasticity of demand in a competitive market.
  • Productive efficiency: means minimising the average cost of production by minimising resource use.
  • Allocative efficiency: occurs when resources are allocated between competing uses in a way that matches the requirements of consumers to the greatest possible extent.
  • Barriers to entry: are obstacles which make it difficult for new firms to enter a market.
  • Patents: give legal protection when a new product is registered
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The Long Tail

  • Selling many less popular products into niche markets
  • Exists because of the internet- for example: iTunes can stock digitally and save money.
  • More consumer choice
  • Demand grows in many niche markets


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The 6 Themes of the Long Tail

1. In virtually all markets there are far more niche goods than hits

2. The costs of reaching niches are falling constantly.

3. Consumers need tools and techniques to find niches matching their taste

4. Once there is access to expanded variety, niches become more popular in comparison to hits

5. There are so many niche products that they rival the hits

6. The natural pattern of demand is extremely diverse

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