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ECON 208 Lecture Notes - Monopolistic Competition, Imperfect Competition, Perfect Competition

Economics (Arts)
Course Code
ECON 208
Sebastien Forte

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Chapter 11
Most industries in Canada have either a large number of small firms or a
small number of large firms
Imperfectly competitive firms have differentiated products and often engage
in non-price competition
Strategic behaviour is a key feature of oligopoly
For industries with many small firms, the perfectly competitive model does
not adequately explain many industries that have a large number of
relatively small firms
For industries with a few large firms, most modern industries that are
dominated by large firms contain several firms and these are not competitive
Industrial Concentration: the concentration ratio measures economic power
in an industry shows the market shares of largest 4 or 8 producers (it shows
the clout of large and small firms)
Defining a market with a reasonable accuracy is difficult.
Sometimes the market is much smaller than the whole country. Other times,
it is much larger than the entire country
Ex. Of concentration ratio:
in petroleum and coal, and beverage and tobacco products, the
concentration ratios are 50% plus
Machinery, fabricated materials and clothing have very low concentration
Due to globalization, a long firm in one Canadian industry may be competing
with foreign firms operating in Canada (ex. Bombardier competes with a big
company in Brazil)
What is imperfect competition?
A differentiated product: a group of products that are similar enough to be
called the same product but different enough that they can have different
Most firms in imperfectly competitive markets sell differentiated products-
ex. Laundry soaps, beer, cars, running shoes (anything you can find in a no
name brand, things with many different products at different prices)
Typically, firms are price setters.
Often, these prices vary only slowly over time
Firms often let output vary in response to demand chocks to avoid costs of
changing prices (unless the shock is long-lasting)
Imperfectly competitive firms typically engage in behaviour that is absent in
either monopoly or perfect competition:
o Firms often spend large sums of money of advertising
o Firms often engage in non-price competition
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