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econ.docx - Chapter 8: Pricing Power: Monopoly to...

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Chapter 8: Pricing Power: Monopoly to Competition and In BetweenPrice Makers and Price TakersBusinesses aim for monopoly’s economic profits and price-making power. Competitorsusually push businesses toward the normal profits and price taking of perfectcompetition.Monopoly:only seller of product or service no close substitutes availableDemand curve is steep and inelasticMarket Power:business’s ability to set pricesPrice Marker:monopoly with maximum power to set pricesBusinesses can set any price, but cannot force consumers to buyEven monopoly price makers must live by law of demandPerfect competition:many sellers producing identical products or servicesDemand curve is horizontal and perfectly elastic at the market pricePrice taker
Business with zero power to setpricesMarket StructurePricing power depends on thecompetitivenessof a business’s market structure -available substitutes, number of competitors, barriers to the entry of new competitors -and on elasticity of demandMarket structure:characteristics affecting competition and pricing powerAvailable substitutesNumber of competitorsBarriers to entry of new competitorsBroader definition of market: more substitutes and competitors, more elastic demand, lesspricing powerNarrower definition of market: fewer substitutes and competitors, more inelastic demand,

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