Chapter 4. Competitive and concentrated markets. Revision notes

Price taker- A firm that accepts the market price, as it is out of their control. This is due to the conditions being out of their control.

Price maker- A firm that will have the power to set the market price, which all firms then follow.

Perfect competition- is when there is lots of different firms in a market and everyone in that market has perfect information. There is only one good or service and the market decides the price.

Competitive markets-  This is where firms strive to do better than their rivals, but might not meet the conditions of perfect competition.

Concentrated markets- This is where only a few firms are in the market or in extreme cases only one.

Pure Monopoly-  This is when there is only one firm in the market

Imperfect competition- any market structure lying between the extremes of perfect competition and apure monopoly.

Profit maximisation- this is when a firm is making the highest possible profit that it can. Revenue is massively above total costs.

Sales maximisation- occurs when sales revenue is maximised.

Other possible objectives:

• Growth maximisation occurs when the decision makers within a firm try to make the firm grow as fast as possible, even though this could damage any profits.

• Market sharemaximisation, this is when a firm tries to increase their market share within a market.

• Firms may want to just survive, if the market is really competitive.

Entry barrier-   makes it difficult or impossible for new firms to enter a market.

Exit barrier- Makes it difficult for firms to leave markets

Natural barriers- This isn’t a man made barrier to market entry. Things like economies of scale and indivisibilities.

Artificial barriers- These are man made to stop people entering a market. E.G. Patents

• The strict definition of the word monopoly is a pure monopoly. Where there is only a firm in a market.

• The looser definition is to do with a market where there is one firm controlling it, but there is other small firms.

• Natural monopoly- This will happen if there can only be one firm that can benefit fully from the us of economies of scale.

• When a firm or country has complete control over natural resources.

• And

  • When a market can only have one firm benefiting from economies of scale.

  Patent-  This is a barrier that is strategic or manmade, in order to protect a firm who is a sole producer of a good or service. This is made by the gov and is a legislation

Informative advertising:  This provides consumers and producers with useful info about a good or service. As it provides useful info, it usually creates more competition.

Persuasive advertising: This attempts to convince customers to buy the good or service, and it is good for them. This can reduce competition, because customers are unwilling to buy a cheaper substitute.

Saturation advertising- This is covering the market with info and persuasion about a firm’s product. This can be a man made barrier to entry.

Product differentiation- This is the making of a product different to other products in the market. This can be through, product design, the method of producing it, or its functionality.

The two ways the downward curve affects the monopolist are:

• It dictates the maximum output that can be sold at this price.

• But, if they are a quantity setter, the curve dictates the maximum price at which the chosen quantity can be sold.

Quantity setter- this is how much of the good to sell in the market is dictated by one firm.

Oligopoly- this is a market where there is a few firms that completely dominate it.

Resource allocation- when resources are allocated in a way which does not maximise economic welfare.

Collusion- is the co-operation between firms, for example to fix prices. Some forms of this can be in the public interest.

Invention- creating new ideas for products or processes.

Innovation- converts the results of inventio into marketable products or services.

Price competition.

• This is where a firm will reduce the price of a good or service, to gain more sales, and make customers notice them more.

• It is suggested competitive firms don’t do this, because it leads to price wars.

Special offer pricing- This is firms introducing a special offer on their price for a short period to increase profits.

Limiting pricing- This is where firms in a competitive market sacrifice short-run profit maximisation in order to increase long-run profit maximisation. Reducing the price of a good to just above average costs to deter the entry of new firms into the market.

Predatory pricing- temporarily reducing the price of a good to below the average cost to remove small firms,or the prevent a new firm entering the market.