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 four market structures– perfect competition, monopolistic competition, oligopoly, and monopoly—and the characteristics of each The demand conditions for businesses in each market structure The demand conditions for businesses in each market structure Nonprice competition through product differentiation and advertising Nonprice competition through product differentiation and advertising Industrial concentration—how it is measured, and the arguments for and against it 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 A market structure characterized by many buyers and sellers of a standard product and easy entry to and exit from the industry 1. Many Buyers and Sellers 2. Standard Product 3. 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 A market structure characterized by many buyers and sellers of slightly different products and easy entry to, and exit from, the industryOligopoly A market structure characterized by only a few businesses offering standard or similar products and restricted entry to the industry 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 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 Economic or institutional obstacles to businesses entering an industry

6. Types of Entry Barriers 1. Economies of Scales Natural monopoly: a market in which only one business is economically viable because of a economies of scale Natural monopoly: a market in which only one business is economically viable because of a economies of scale 2. Market Experience 3. Restricted ownership of Resources

7. Types of Entry Barriers 4. Legal Obstacles 5. Market Abuses  Predatory pricing: an unfair business practices of temporarily lowering prices to drive out competitors in an industry 6. Advertising

8. Market Power A business’s ability to affect the price of the product it sells A business’s ability to affect the price of the product it sells 1. Number of Competitors 2. Size 3. 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 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 The relationship among oligopolists, in which the actions of each business affect the other businesses Rivalry Among Businesses Market share Market share A business’s proportion of total market sales 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 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 Efforts to increase demand through product differentiation, advertising, or both Efforts to increase demand through product differentiation, advertising, or both 1. Product Differentiation Efforts to make a product distinct from that competitors Efforts to make a product distinct from that competitors 2. Advertising raises prices for consumers raises prices for consumers offer more variety and choice offer more variety and choice raises profits for business raises profits for business

15. Industrial Concentration Concentration Ratio The % of total sales revenue in a market earned by the largest business 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) Domination of a market by one or a few large companies ( 4 firms > 50% sales revenue) Arguments for Arguments for 1. Economies of scale 2. Technical innovation Arguments against: Arguments against: 1. Market power (higher price) 2. Lack of competition ( poorer quality, less innovation)

17. Kind of MarketPure Competition Monopolistic Competition Oligopoly (Homogeneous) Oligopoly (Differentiated) Pure Monopoly Number of producers and type of product Many sellers Identical product  Many sellers  Some product distinction  Few sellers  Some product distinction  Few sellers  Much product distinction  One seller  No product substitutes Conditions of entry into industry  Easy to enter  Easy to enter the  Difficult to enter  Very difficult or impossible to enter Influence over price  No control over price  Some control over price  Limited by interdependence or firms  Some control over price  Limited by interdependen ce of firms— “price searcher”  Considerabl e control over price – “ price maker” Existence of non-price competition  None  Some— especially advertising  Little use made of advertising  Considerable non-price competition— like advertising  Advertising of firm’s “image” Example:  Stock market  Certain agricultural markets  Retail trade  Clothing  Many services industries  Steel  Aluminium  Pulp  Cement  Automobiles  Tires  Breakfast cereals  Soap  Electrical energy  Water  Gas  Urban transit system