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Lecture notes 4.1.1 spectrum of competition
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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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4.1.1 spectrum of competition
Monopoly
o More than 25% market share gives firm monopoly power
o Earns supernormal profits
o Profit maximisation
o Price maker
o Price discrimination
o Sole seller in market (pure monopoly)
o High barrier to entry
o Monopoly power can be gained if there are multiple suppliers
o Few examples of pure monopolies
Public utilities
Gas
Water
Electric
o Barrers to entry
Economies of scale
Produce for much cheaper
Limit pricing
Set certain prices so you have control
Owning a resource
Brand loyalty
Setup costs
Sunk costs
Unrecoverable costs such as advertising deter firms from markets.
Number of competitors
Advertising
Degree of product differentiation
Oligopoly
o Multiple big companies that dominate a particular sector of the market.
High barriers to entry and exit
High concentration ratio
Independence of firms
Product differentiation
Imperfect competition
, o Characteristics of an economic market doesn’t fulfil necessary conditions of a perfectly
competitive market.
o Level of competition between sellers
o Monopolistically competitive market has imperfect competition
o Firms sell nonhomogeneous products due to branding
o Compete on price
o Hairdressers have monopolistic competition
o Price makers
o Heterogeneous products (differentiated)
o 1 seller many buyers
o High barriers to entry
o Price makers
Perfect competition
o Theoretical market structure where competition does not exist between firms or sellers
o Ideal market scenario as it allocates the available resources most efficiently.
o Pure competition
Many buyers & sellers
Sellers are price takers
Prices are unanimous everywhere
Free to enter and exit market
No barriers
Perfect knowledge
Everyone is aware what is happening.
Homogenous goods
All products are the same
Firms are short run profit maximisers
FOP is perfectly mobile
Turn one thing into another without wasting time or money
Transition from farming to manufacturing
Price determined by interaction of supply & demand
Profits likely to be lower
o How the model of perfect competition helps to explain how markets work?
Rare to see an example of perfect competition in the world
Commodity markets are close to the model as they are homogenous
Profit maximisation equilibrium in short term & long term
Short term = super normal profits
Long term = normal profits
Short run equilibrium with perfect competition
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