CIA4U0 Analyzing Current Economic Issues Chapter 7: Production, Firms & The Market Topic 2: Firms, Competition & The Market P

Production/Firms/Market Topic Overview Introduction Market Structures Perfect Competition Monopolistic Competition Oligopoly Monopoly

Production/Firms/Market Introduction Firms consider many factors in developing goals and strategies Profit maximization underlies everything The purpose of economic activity is to satisfy consumer needs Profit maximization is the way in which we achieve this Competition (or choice of product) is what keeps firms accountable to consumers

Production/Firms/Market Introduction Ways in which firms compete: Price Non-Price Competition Quality Service Warranty/support Style Location Convenience

Production/Firms/Market Market Structure The nature of competition is called Market Structure There are five attributes that are used to describe a Market Structure: 1. The number/size of firms in the market 2. The degree to which competing products are similar 3. A firms control over price 4. The ease with which a firm can enter or leave the market 5. The amount of non-price competition

Production/Firms/Market Market Structure Refer to Figure 7.11 on 153 of your text; Copy it into your notes if necessary There are 4 general kinds of Market: Prefect Competition Monopolistic Competition Oligopoly Monopoly Each is described using the five attributes listed on the previous slide

Production/Firms/Market Perfect Competition Many small sellers, highly competitive Firm has no influence on price so success depends on managing/reducing costs If costs are reduced enough, profit will become high enough to attract other suppliers, increasing supply This market guarantees the lowest price for consumers while allowing just enough profit for sellers

Production/Firms/Market Monopolistic Competition A large number of sellers but small firms Product can be differentiated (set apart) Success depends on how well a company can stand out and develop brand loyalty Common in service and retail industries

Production/Firms/Market Oligopoly Domination of a market by a few, very large firms Prices rise and fall but seem to do so across all firms (gasoline, banking) Prices for similar products or services are more or less the same across competitors Non-Price competition is intense and success depends on delivering on these promises

Production/Firms/Market Monopoly Domination of a market by one company Sometimes occurs as the result of intellectual property laws (copyrights, patents) Natural monopolies (Utilities) Government created monopolies (TV) Success depends on convincing your customers that yours is the best way