Principles of Economics

2nd edition by Fred M Gottheil

prepared by Azhar Rind

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Chapter 10
Identifying Markets and Market Structures

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This chapter discusses principles associated with

The Use Characteristics of Cross Elasticity of The The Relationship Characteristics between of Characteristics of Monopoly The Market Role of Structures Advertising Perfect toIndustries, Define Competition Markets Firms, Monopolistic Competition and Markets
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What is a Relevant Market?

The set of goods whose cross elasticities with others in the set are relatively high and whose cross elasticities with goods outside the set are relatively low
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What is an example of a Relevant Market?

In 1953 DuPont was ruled to be in the flexible packaging market and not exclusively in the cellophane market
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What determines if goods are in the same market?

If their cross elasticity is 3 or greater they are considered to be in the same market
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What determines Market Structure?

A set of market characteristics such as number of firms, ease of entry, and substitutability
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What is considered an Industry?

A collection of firms producing the same good

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What are the four types of markets?

Monopoly Oligopoly Monopolistic Competition Perfect Competition
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What is a Monopoly?
A market structure with only one firm producing goods that have no substitutes and impossible barriers of entry into the market
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What is a Natural Monopoly?

A market structure that cannot support more than one firm
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Why would a market structure not support more than one firm? The fixed cost in setting up production are so high the firm must have access to a large market to have a low average cost curve
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What are other reasons for Monopoly?

The acquiring of an exclusive right to a nonreproducible resource Government protection Buy the competition
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What is an example of Government protection?

The granting of a patent

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What is a Patent?
A monopoly right to the use of a specific new technology or the production of a new good
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Why grant Patents?

To encourage inventions and innovations

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http://www.uspto.gov/ http://www.patentspending.com http://www.idresearch.com

http://www.napp.org/
http://www.nationalpatent.com
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What is Monopolistic Competition?

A market structure consisting of many firms producing goods that are close substitutes and entry into the market is relatively easy
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What is Oligopoly?
A market structure consisting of a few firms producing goods that are close substitutes and entry into the market is difficult
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What is Product Differentiation?

The physical or perceived differences among goods in a market that makes them close substitutes
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How do Pepsi & Coca-Cola differentiate themselves?

http://www.pepsi.com http://www.cocacola.com
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What is Brand Loyalty?

The willingness of consumers to continue buying a good at a price higher than the price of its close substitutes
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What is Market Share?

The percentage of total market sales produced by a firm in a market

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How do American Automobile Companies advertise on the net?

http://www.chrysler.com http://www.gm.com http://www.ford.com
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What happens to the demand curve as more firms enter the industry?
It becomes more elastic

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D D
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What happens when a firm effectively advertises?

The demand curve becomes more inelastic

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D D
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What is Perfect Competition?

A market structure consisting of a large number of firms producing goods that are perfect substitutes and entry into market is easy
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Can a Perfectly Competitive firm influence the market price? No!

The firm is so small compared to the total market that it has no influence over the price
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Does the Perfectly Competitive Firm have to sell at the market price?
It can sell all units it brings to market at the market price but will not sell one unit at a higher price
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What does the Demand Curve look like for a Perfectly Competitive Firm? It is perfectly horizontal at the market price
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The Firms Demand Curve in Perfect Competition

P

d
Individual quantity
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Market quantity

What is a Relevant Market? What is a Monopoly? What is a Natural Monopoly? What is a Patent? What is Monopolistic Competition? What is Oligopoly? What is Perfect Competition?
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END
1999 South-Western College Publishing

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