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Chapter 5Chapter 5 The Nature of Markets The Nature of Markets
Gr. 12 EconomicsGr. 12 Economics
Chapter FocusChapter Focus
The four market structures– perfect The four market structures– perfect competition, monopolistic competition, competition, monopolistic competition, oligopoly, and monopoly—and the oligopoly, and monopoly—and the characteristics of eachcharacteristics of each
The demand conditions for businesses in The demand conditions for businesses in each market structureeach market structure
Nonprice competition through product Nonprice competition through product differentiation and advertisingdifferentiation and advertising
Industrial concentration—how it is measured, Industrial concentration—how it is measured, and the arguments for and against itand the arguments for and against it
Market StructuresMarket Structures
Perfect CompetitionPerfect Competition A market structure characterized by A market structure characterized by
many buyers and sellers of a standard many buyers and sellers of a standard product and easy entry to and exit product and easy entry to and exit from the industryfrom the industry
1.1. Many Buyers and SellersMany Buyers and Sellers
2.2. Standard ProductStandard Product
3.3. Easy Entry and ExitEasy Entry and Exit
Market StructuresMarket Structures
Monopolistic CompetitionMonopolistic Competition A market structure characterized by A market structure characterized by
many buyers and sellers of slightly many buyers and sellers of slightly different products and easy entry to, and different products and easy entry to, and exit from, the industryexit from, the industry
OligopolyOligopoly A market structure characterized by only A market structure characterized by only
a few businesses offering standard or a few businesses offering standard or similar products and restricted entry to similar products and restricted entry to the industrythe industry
Market StructuresMarket Structures
MonopolyMonopoly A market structure characterized by A market structure characterized by
only one business supplying a product only one business supplying a product with no close substitutes and restricted with no close substitutes and restricted entry to the industryentry to the industry
Entry BarriersEntry Barriers Economic or institutional obstacles to Economic or institutional obstacles to
businesses entering an industrybusinesses entering an industry
Types of Entry BarriersTypes of Entry Barriers
1.1. Economies of ScalesEconomies of Scales Natural monopoly: a market in which Natural monopoly: a market in which
only one business is economically only one business is economically viable because of a economies of scaleviable because of a economies of scale
2.2. Market ExperienceMarket Experience
3.3. Restricted ownership of ResourcesRestricted ownership of Resources
Types of Entry BarriersTypes of Entry Barriers
4.4. Legal ObstaclesLegal Obstacles
5.5. Market Abuses Market Abuses Predatory pricing: Predatory pricing: an unfair business practices of an unfair business practices of temporarily lowering prices to drive temporarily lowering prices to drive out competitors in an industryout competitors in an industry
6.6. AdvertisingAdvertising
Market PowerMarket Power
Market PowerMarket Power A business’s ability to affect the price A business’s ability to affect the price
of the product it sellsof the product it sells
1.1. Number of CompetitorsNumber of Competitors
2.2. SizeSize
3.3. Price Elasticity of DemandPrice Elasticity of Demand
Demand DifferencesDemand Differences
Business’s demand curveBusiness’s demand curve The demand curve faced by an individual The demand curve faced by an individual
business, as opposed to an entire marketbusiness, as opposed to an entire market
Demand DifferencesDemand Differences
Monopolistic Monopolistic CompetitorCompetitor
OligopolyOligopoly
Mutual interdependence Mutual interdependence The relationship among oligopolists, in which the actions of each The relationship among oligopolists, in which the actions of each
business affect the other businessesbusiness affect the other businesses
Rivalry Among BusinessesRivalry Among Businesses Market shareMarket share
A business’s proportion of total market salesA business’s proportion of total market sales
Demand DifferencesDemand Differences
MonopolyMonopoly
Nonprice CompetitionNonprice Competition
Nonprice Competition and the ConsumerNonprice Competition and the Consumer
Product differentiation leads to higher prices Product differentiation leads to higher prices by raising per-unit costs and enhancing an by raising per-unit costs and enhancing an individual business’s market power. individual business’s market power. However, consumers will likely have more However, consumers will likely have more choices because of businesses efforts to choices because of businesses efforts to differentiate their productsdifferentiate their products
Nonprice CompetitionNonprice Competition
Nonprice CompetitionNonprice Competition Efforts to increase demand through product Efforts to increase demand through product
differentiation, advertising, or bothdifferentiation, advertising, or both
1.1. Product DifferentiationProduct Differentiation Efforts to make a product distinct from that Efforts to make a product distinct from that
competitorscompetitors
2.2. AdvertisingAdvertising raises prices for consumersraises prices for consumers offer more variety and choiceoffer more variety and choice raises profits for businessraises profits for business
Industrial ConcentrationIndustrial Concentration
Concentration RatioConcentration Ratio The % of total sales revenue in a market The % of total sales revenue in a market
earned by the largest businessearned by the largest business
The Debate Over Industrial ConcentrationThe Debate Over Industrial Concentration
Industrial concentrationIndustrial concentration Domination of a market by one or a few large Domination of a market by one or a few large
companies ( 4 firms > 50% sales revenue) companies ( 4 firms > 50% sales revenue)
Arguments for Arguments for 1.1. Economies of scaleEconomies of scale2.2. Technical innovationTechnical innovation
Arguments against:Arguments against:1.1. Market power (higher price)Market power (higher price)2.2. Lack of competition ( poorer quality, less Lack of competition ( poorer quality, less
innovation)innovation)
Kind of Market Pure CompetitionMonopolisticCompetition
Oligopoly (Homogeneous)
Oligopoly(Differentiated)
Pure Monopoly
Number ofproducers andtype 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 ofentry intoindustry
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 firms—“price searcher”
Considerable control over price – “ price maker”
Existence ofnon-pricecompetition
None
Some—especially advertising
Little use made of advertising
Considerable non-price competition—like advertising
Advertising of firm’s “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