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ECN 104 Chapter Notes - Chapter 13: Average Cost, Monopolistic Competition, Monopoly Price

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School
Ryerson University
Department
Economics
Course
ECN 104
Professor
German Pupato

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Document Summary

In order to develop principles and make predictions about markets and how producers will behave in them, economists have developed 4 principal models of market structure: perfect competition, monopoly, oligopoly, monopolistic competition. A monopolist is a firm that is the only producer of a good that has no close substitutes. An industry controlled by a monopolist is known as a monopoly. The ability of a monopolist to raise its price above the competitive level by reducing output is known as market power. This generates profit for the monopolist in the short run and the long run. A monopolist has market power, and as a result will charge higher prices and produce less output than a competitive industry. Profits will not persist in the long run unless there is a barrier of entry. A natural monopoly exists when increasing returns to scale provide a large cost adva(cid:374)tage to a si(cid:374)gle fir(cid:373) that produces all of a(cid:374) i(cid:374)dustry"s output.

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Related Questions

1. if the government attempts to break up a natural monopoly to enforce competition in an industry

A. the average cost of producing the good will increase

B. the smallest firm will have a significant cost advantage over the larger, less efficient firms

C. the average cost of producing the good will decrease

D. the price paid by consumers will be expected to remain the same.

2. which statement is true?

A. the monopolistic competitor always makes a profit in the short run

B. the monopolistic competitor operates at peak efficiency

C. product differentiation takes place in the minds of the buyers

D. none of these statements is true

3. Price discrimination

A. occurs when a good or service is resold

B. is prohibited by law

C. occurs when a seller charges two or more prices for the same good or service

D. occurs when the seller charges different prices for different quality products

4. Monopolistic competition may lead to each of the following except

A. inefficiency

B. overdifferentiation

C. overcapacity

D. monopoly profits

5. In the long run in monopolistic competition

A. most firms are making a profit

B. the absence of entry barriers ensures that there are no profits

C. economies of scale ensure that there are no profits

D. most firms are losing money

6. Price discrimination means

A. charging different prices for identical goods that have identical production costs

B. paying wages according to race or sex rather than productivity

C. exploiting the working masses by charging the highest single price possible.

D. eliminating all costs so that only pure profits are realized

7. The definition of monopolistic competition includes

A. few firms and ease of entry and exit

B. few firms and barrieres to entry and exit

C. many firms and barriers to entry and exit

D. many firms and ease of entry and exit

8. Which statement is true?

A. there are many firms in a monopolistically competitive industry.

B. monopolistic competitors produce an identical product

C. in order for product differentiation to take place, there must be clear physical differences amont the products sold

D. none is true

9. Long-run equilibrium for firms in monopolistically competitive industries is similar to that for firms in perfect competition in that

A. price equals minimum possible average total cost

B. price equals marginal cost

C. marginal revenue equals average total cost

D. price equals average total cost

10. Which statement is false?

A. Oligopolies are illegal in most states

B. most oligopolies engage in outright collusion

C. Ford motor company is an oligopoly

D. none of these statements is false

Please analyze the barriers to entry for Starbucks. For the market your company operates in, you will detail the barriers to entry—some markets have more than others, and some barriers are weaker than others. Your specific situation will allow you to explain how the existing barriers will either help insulate your company from competition or allow for competitors to break into the market. Please describe the market structure for your firm and analyze how this affects the firm’s ability to influence the market. Keep in mind that there are four different market structures: perfect competition, monopolistic competition, oligopoly, and monopoly. You need to categorize your company’s market into one of these four. Include any supporting evidence you have presented so far. You can also use the four-firm concentration ratio and/or the Herfindahl-Hirschman Index (HHI) to support your conclusion. Once you have determined the market structure, you can then analyze your company’s ability to influence the whole market based on this and its position within the market. *this example uses the top 50 firms—you will not necessarily have to use that many.

See the question and two answers, give brief your own opinion for each answer( are you agree on disagree with the answer, why?)

Q:This week, we are discussing market types. In this forum, please pick one of the market types that are presented in your textbook and provide your own definition (use your own words) and example. What do you think are the benefits vs. deficiencies of your chosen market type?

Answer 1)

Perfect Competition

This kind of market type stipulates the overall advantage that a market has. In this market, there are many sellers and buyers.These players do not control the price of commodities or services but the prices are controlled by the demand and supply of goods and services. As a result of this, no one can determine the market price of commodities because customers will switch to the next best alternative. All the market players in this sense are price takers and the customers that subscribe to these goods have a lot of experience about the goods offered. It means therefore that they have adequate information about the goods available, which means, therefore, they are aware of the prices that are being charged. All the firms that exist in this kind of market type have a relatively small market share because of the existence of so many of them. The market is also characterized by free entry and exit of firms. New firms can enter the market if they so wish and create competition to the existing firms. Due to this nature of many firms, most of them only earn enough to keep them on the market and nothing more for these firms (Makowski & Ostroy, 2001).

Answer 2)

The Oligopoly; best recognized by few sellers, identical (or similar) products, and its difficult entryinto the market. A good way to determine if a market has an oligopoly is if the change in one seller, causes its "competition" to change likewise. Automotive, cell phone industries, and aviation are some examples of markets that have an oligopoly. In the automotive industry, if one vehicle producer (lets say Chevrolet) changes the body style of its line up, other "completion" is soon to follow. Notice how cars these days are getting nicer and nicer for the base model? Research and Development is greatly valued in an industry that has an oligopoly. This is because if a seller lowers prices, they understand that its competitors will soon follow with ease. But, if they develop a better improvement over its last model in technology, it is much harder to follow than just a reduction in price.

The advantage of an oiligolpoly is that the leaders can set prices instead of take them. Which leads to those that are in charge having the ability to increase profit margins above what they would be in a truly free market.

The disadvantage is that for those looking to try to get into the market will have much difficulty because of the common huge capitol expenditures required to actually compete with the big boys.