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The general environment wherein the forces
of supply and demand interact
identifies how a market is made up in terms of:
The number of firms in the industry
The nature of the product produced
The degree of monopoly power each firm has
The degree to which the firm can influence price
Profit levels
Firms’ behaviour – pricing strategies, non-price
competition (E, output levels
The extent of barriers to entry
The impact on efficiency
Typeof market structure influences how a
firm behaves:
Pricing
Supply
Barriers to Entry
Efficiency
Competition
Freedom of entry and exit
Nature of the product – homogenous
(identical), differentiated?
Control over supply/output
Control over price
Barriers to entry
Profit (π) = Total revenue – Total cost
Π is Greek Letter P
Trivia:
Economics also used Greek letters same as in
mathematics such as Alpha, Beta, Lambda, Delta, and
etc
Perfect Competition
Monopolistic Competition
Oligopoly
Monopoly
Ideal market situation
A free market
means ease of movement of productive inputs in
and out of the market in response to monetary
input
Large number of buyers and a relatively large
number of sellers
small firms compete with each other
All firms maximize profit
Free entry and exit to industry – majority
of them are small businessmen; can freely
enter and exit as long as there is profit
There is always new players in the market
MONOPOLISTICCOMPETITION=
MONOPOLY+PERFECT COMPETITION
Plumbers/electricians/local builders
Solicitors
Private schools
Plant hire firms
Insurance brokers
Building firms
Health clubs
Funeral directors
Estate agents
Damp proofing control firms
COMPETITION AMONGST THE “Few”
Industry dominated by small number of large firms
Many firms may make up the industry
High barriers to entry
Products could be highly differentiated – branding or
homogenous
Non–price competition
(Focus more on design, advertising, and workmanship)
Price stability within the market - kinked demand
curve?
Potential for collusion?
Abnormal profits
High degree of interdependence between firms
2 or more firms dominate the market
4-firm concentration ratio is often utilized
High barriers to entry and exit
Homogenous products
Business have huge influence over price and
other
With few sellers in the market, each
oligopolist is likely to be aware of the actions
of the other
They can form a collusion,
a formal agreement between firms to cooperate by
varying prices, diving markets, or restraining
competitions.
Increase their profit by means of price fixing, limiting
supply, or other restrictive practices.
Cartel – an organization of businessmen who
control the price and quantity of the products
and the distribution of the produced goods to
gain the maximum profit. ( it may be open or
discreet)
Example of a cartel
Organization of the Petroleum Exporting
Countries (OPEC)
-deciding on world oil prices
CEMENT, RICE, SUGAR CARTELS