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ECO3041 - Ch 6 Competition

ECO3041 - Ch 6 Competition - Chapter 6 Notes Chapter 6 I...

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Chapter 6 Notes Chapter 6 Competition I. Market Structure Market Power is when “a company [has the] ability to manipulate price by influencing an item's supply, demand or both. A company with market power would be able to affect price to its benefit. Firms with market power are said to be "price makers" as they are able to set the price for an item while maintaining market share . Generally, market power refers to the amount of influence that a firm has on the industry in which it operates.” 1 Market structure is the number and relative size of firms in an industry. Competitive market is a market in which no company has market power, and companies have no ability to alter the market price of the goods it produces. In a competitive market neither the sellers nor buyers have market power. Perfect competition is a market in which there are many firms, each selling an identical product; many buyers; no restrictions on the entry of new firms into the industry; no advantage to established firms; and buyers and sellers are well informed about price. Monopoly is a firm that produces the entire market supply of a particular good or service. Market power is the ability to alter the market price of a good or services. A Monopoly are the extreme case of market power (i.e., they have 100 percent of the market supply). Duopoly is a market where only two firms supply a particular product. Oligopoly is a market where a few large firms supply all or most of a particular product. II. Perfect competition Monopolistic competition – It’s a market in which a large number of firms compete by supplying essentially the same product. 1 (Inverstopedia ULC 2010) 1 | P a g e
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Chapter 6 Notes Monopolistic competition is a market structure in which: A large number of firms compete. Each firm produces a differential product. Firms compete on price, product quality, and marketing. Firms are free to enter and exit. Price taker Since the producers in a perfectly competitive market are so small and there is no product differentiation when they go to the market, they must sell at the price provided to them by the market. Hence in a perfectly competitive market, suppliers are price takers . Market demand vs. firm demand In perfect competition (AKA perfectly competitive market), market demand and market supply are determine by the price (P). The distinction between the actions of a single producer and those of the market are illustrated by: The market demand curve for a product is always downward sloping (think law of demand) The demand curve facing a perfectly competitive firm is horizontal (think equilibrium price) III. The Firm’s production decision Production decision is the selection of the short-run rate of output (with existing plant and equipment).
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ECO3041 - Ch 6 Competition - Chapter 6 Notes Chapter 6 I...

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