ECONOMICS ECONOMICS Year Year 1010

Chapter 8Chapter 8

Market StructuresMarket Structures

What is the main aim of a What is the main aim of a firm??firm??

When a household spend $$, it aim When a household spend $$, it aim to get best value for moneyto get best value for money

Firm – Owns by shareholders. Their Firm – Owns by shareholders. Their aim is to get bet value for money aim is to get bet value for money invested – dividend.invested – dividend.

Therefore – main aim is to make $$$ Therefore – main aim is to make $$$ lost of $$$lost of $$$

→ → MAXIMIZE PROFITSMAXIMIZE PROFITS

Need TO COMPLETE with other Need TO COMPLETE with other firms to achieve their aim - maximize firms to achieve their aim - maximize profitsprofits

HOW?HOW?

Increase customer base – complete Increase customer base – complete each other is price and qualityeach other is price and quality

increase sales – cut price ↑ sales rev increase sales – cut price ↑ sales rev if demand is price elastic. if demand is price elastic.

P

Qd

% ∆ in P is < % ∆ in Qd

Advertising/ promotionsAdvertising/ promotions expand market share - ↑ sales in expand market share - ↑ sales in

market to boost revenuemarket to boost revenue achieve brand or product achieve brand or product

superioritysuperiority to enhance imageto enhance image to max profitto max profit

What is Competition??What is Competition??

Lead to greater efficiency. The more Lead to greater efficiency. The more firm the betterfirm the better

Perfect Competition Imperfect Competition Perfect Competition Imperfect Competition Monopoly Monopoly

Perfect competition Perfect competition Large # of small producersLarge # of small producers All producing identical products or All producing identical products or

HOMOGENEOUS productHOMOGENEOUS product No barriers to entry and exitNo barriers to entry and exit All firms have same info and technologiesAll firms have same info and technologies Consumers and producers are all Consumers and producers are all PRICE PRICE

TAKERTAKER. If I increase price, no customer . If I increase price, no customer will buy and he will lower back the price.will buy and he will lower back the price.

Example: FarmersExample: Farmers

Imperfect competition:Imperfect competition: Only a few big companies complete. Only a few big companies complete. Example: BOEING & AIRBUS in Example: BOEING & AIRBUS in

commercial airlines industrycommercial airlines industry

MonopolyMonopoly

Only one firm produces all outputOnly one firm produces all output Example: Utility companyExample: Utility company

FEATURES of FEATURES of COMPETITIONCOMPETITION

In a competitive market, firms not In a competitive market, firms not free to set any price they wishfree to set any price they wish

If comp very fierce, prices will be If comp very fierce, prices will be forced downwardsforced downwards

Consumers can have choiceConsumers can have choice Firms may cut quality to reduce costFirms may cut quality to reduce cost Forces firms to be efficient Forces firms to be efficient

WAYS OF COMPETITIONWAYS OF COMPETITION

Price CompetitionPrice Competition Reducing the price @ which a firm is Reducing the price @ which a firm is

willing to sell its products below other willing to sell its products below other firm’s pricefirm’s price

Undercut rivalsUndercut rivals

Non Price CompetitionNon Price Competition Differentiating features of goods or Differentiating features of goods or

services e.g Promotion, free gifts, services e.g Promotion, free gifts, publicity. Advertising, after sales servicepublicity. Advertising, after sales service

Is COMPETITION GOOD OR Is COMPETITION GOOD OR BAD FOR CONSUMER?BAD FOR CONSUMER?

GOODGOOD BADBAD

*Reduce Prices*Reduce Prices *Advert and *Advert and packaging packaging wasteful wasteful as prices tend to as prices tend to pass pass on to consumers on to consumers

*Increase Quality*Increase Quality

*Availability of *Availability of

different productsdifferent products DO EXERCISE 1 pp 137

COMPETITIVE PRICING COMPETITIVE PRICING STRATEGIESSTRATEGIES

Use short term price strategies to Use short term price strategies to expand sales and market share at expand sales and market share at the expense of the rivals such as:the expense of the rivals such as:

• Penetrating pricing – low price to establish new product

• Expansion pricing – as demand increase, firm increase output

• Price leadership – All firms team to set same price.

Market skimming (Price creaming) – Market skimming (Price creaming) – high price for new products to get high high price for new products to get high profitprofit. AS COMPETITORS ↑ LOWER . AS COMPETITORS ↑ LOWER PRICE TO EXPAND MARKET DEMAND.PRICE TO EXPAND MARKET DEMAND.

Price wars – Gains short lived. If long Price wars – Gains short lived. If long period some firms might close down period some firms might close down giving only few firms to control market. giving only few firms to control market. Not good for consumerNot good for consumer

Destruction pricing – destroy the Destruction pricing – destroy the competitors to push them out of the competitors to push them out of the market.market.

MARKET STRUCTUREMARKET STRUCTURE

Describe how a mkt is organized in terms of Describe how a mkt is organized in terms of how much competition there is among how much competition there is among producers.producers.

Competition make full use of resources – Competition make full use of resources – produce outputs at the lowest cost to increase produce outputs at the lowest cost to increase profit.profit.

Any restriction will cause a misallocation of Any restriction will cause a misallocation of resources. Govt always interfere in mkt to resources. Govt always interfere in mkt to ensure sufficient competitionensure sufficient competition

How to examine the amt of How to examine the amt of competition in a market:competition in a market:

The amt of control a firm or group The amt of control a firm or group has over outputhas over output

The amt of influence a firm or group The amt of influence a firm or group has over market pricehas over market price

The freedom new suppliers have to The freedom new suppliers have to enter a marketenter a market

Barriers to entry that restrict new Barriers to entry that restrict new competition.competition.