Download Chapter 5 The Nature of Market

Chapter 5
The Nature of Markets
Gr. 12 Economics
Chapter Focus




The four market structures– perfect competition,
monopolistic competition, oligopoly, and
monopoly—and the characteristics of each
The demand conditions for businesses in each
market structure
Nonprice competition through product
differentiation and advertising
Industrial concentration—how it is measured,
and the arguments for and against it
Market Structures
Perfect Competition

1.
2.
3.
A market structure characterized by many
buyers and sellers of a standard product and
easy entry to and exit from the industry
Many Buyers and Sellers
Standard Product
Easy Entry and Exit
Market Structures
Monopolistic Competition

A market structure characterized by many
buyers and sellers of slightly different
products and easy entry to, and exit from, the
industry
Oligopoly

A market structure characterized by only a
few businesses offering standard or similar
products and restricted entry to the industry
Market Structures
Monopoly

A market structure characterized by only one
business supplying a product with no close
substitutes and restricted entry to the industry
Entry Barriers

Economic or institutional obstacles to
businesses entering an industry
Types of Entry Barriers
1.
Economies of Scales

2.
3.
Natural monopoly: a market in which only
one business is economically viable because
of a economies of scale
Market Experience
Restricted ownership of Resources
Types of Entry Barriers
4.
5.
6.
Legal Obstacles
Market Abuses Predatory pricing: an
unfair business practices of temporarily
lowering prices to drive out competitors
in an industry
Advertising
Market Power
Market Power

1.
2.
3.
A business’s ability to affect the price of the
product it sells
Number of Competitors
Size
Price Elasticity of Demand
Demand Differences
Business’s demand curve

The demand curve faced by an individual business, as
opposed to an entire market
Demand Differences
Monopolistic Competitor
Oligopoly
Mutual interdependence

The relationship among oligopolists, in which the actions of each business
affect the other businesses
Rivalry Among Businesses

Market share

A business’s proportion of total market sales
Demand Differences
Monopoly
Nonprice Competition
Nonprice Competition and the Consumer

Product differentiation leads to higher prices
by raising per-unit costs and enhancing an
individual business’s market power. However,
consumers will likely have more choices
because of businesses efforts to differentiate
their products
Nonprice Competition
Nonprice Competition

Efforts to increase demand through product
differentiation, advertising, or both
Product Differentiation
1.

Efforts to make a product distinct from that
competitors
Advertising
2.



raises prices for consumers
offer more variety and choice
raises profits for business
Industrial Concentration
Concentration Ratio

The % of total sales revenue in a market
earned by the largest business
The Debate Over Industrial Concentration
Industrial concentration


Arguments for
1.
2.

Domination of a market by one or a few large
companies ( 4 firms > 50% sales revenue)
Economies of scale
Technical innovation
Arguments against:
1.
2.
Market power (higher price)
Lack of competition ( poorer quality, less innovation)
Kind of Market
•
Number of
producers and
type of product

Easy to
enter

Existence of
non-price
competition
No control
over price


Example:
Many
sellers
Identical
product
•
Conditions of
entry into
industry
Influence over
price
Monopolistic
Competition
Pure Competition



Easy to enter
the

Some control
over price

Stock
market
Certain
agricultural
markets





Many sellers
Some product
distinction

None
Oligopoly
(Homogeneous)
Some—
especially
advertising
Retail trade
Clothing
Many services
industries
Few sellers
Some product
distinction

Difficult to enter

Limited by
interdependence
or firms
Some control
over price


Oligopoly
(Differentiated)



Limited by
interdependen
ce of firms—
“price
searcher”

Considerable
non-price
competition—
like
advertising
Steel
Aluminium
Pulp
Cement






One seller
No product
substitutes

Very difficult
or
impossible
to enter

Considerabl
e control
over price –
“ price
maker”

Advertising
of firm’s
“image”
Difficult to
enter

Little use made
of advertising




Few sellers
Much product
distinction
Pure Monopoly

Automobiles
Tires
Breakfast
cereals
Soap



Electrical
energy
Water
Gas
Urban
transit
system