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Lecture notes 4.1.2 Barriers to entry
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These notes helped me get an A* in A Level Economics, covering all aspects of the specification, plus hints of real world context.
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4.1.2 Barriers to entry Barriers that stop firms entering markets
Characteristics of contestable markets:
o Face actual and potential competition
o Free access to production techniques and technology
o No significant entry or exit barriers
o Low consumer loyalty
o Number of firms in market varies
Implications of contestable markets on firms' behaviour
o Firms are allocatively efficient
o Operate at bottom of average cost curve
o Firms are predictably efficient
o Low barriers to entry provide easy access to market
o Firms enter market make supernormal profits and leave
Hit and run competition
o Highly competitive markets are perfectly competitive
o Supernormal profits short term
o Normal profits in long term
o However, in practice firms can only make normal profits
It is the only way to prevent competition
Without supernormal profits there Is no incentive for competition
Types of barriers to entry
o Block new entrants into the market
o Greater the economies of scale
Less likely a firm enters the market
o Legal barriers
Patents an exclusive right to production
Need a licence to operate in some markets
Taxi
Pub
o Consumer loyalty
Price inelastic demand
Consumers will buy their favourite regardless of cost
o Predatory pricing
Large firms set prices so low so that it drives other firms out of the market
Short term leads to them making a loss
Reduces contestability
o Limit pricing
Put a price lower than other firms can afford to have so they make profits, but
new firms can't
o Anti-competitive practices
Illegal
Suppliers don’t supply some market competitors
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