Chapter 5 The Nature of Markets

1. Chapter 5 The Nature of Markets Gr. 12 Economics

2. 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

3. Market Structures Perfect Competition • 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

4. 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

5. 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

6. Types of Entry Barriers • Economies of Scales • Natural monopoly: a market in which only one business is economically viable because of a economies of scale • Market Experience • Restricted ownership of Resources

7. Types of Entry Barriers • Legal Obstacles • Market Abuses Predatory pricing: an unfair business practices of temporarily lowering prices to drive out competitors in an industry • Advertising

8. Market Power Market Power • A business’s ability to affect the price of the product it sells • Number of Competitors • Size • Price Elasticity of Demand

9. Demand Differences Business’s demand curve • The demand curve faced by an individual business, as opposed to an entire market

10. Demand Differences Monopolistic Competitor

11. 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

12. Demand Differences Monopoly

13. 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

14. Nonprice Competition Nonprice Competition • Efforts to increase demand through product differentiation, advertising, or both • Product Differentiation • Efforts to make a product distinct from that competitors • Advertising • raises prices for consumers • offer more variety and choice • raises profits for business

15. Industrial Concentration Concentration Ratio • The % of total sales revenue in a market earned by the largest business

16. The Debate Over Industrial Concentration Industrial concentration • Domination of a market by one or a few large companies ( 4 firms > 50% sales revenue) • Arguments for • Economies of scale • Technical innovation • Arguments against: • Market power (higher price) • Lack of competition ( poorer quality, less innovation)