ECO100Y5 Lecture Notes - Lecture 11: Imperfect Competition, Perfect Competition, Shampoo

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Imperfectly competitive firms are defined by two main statements: firms choose the variety of the product that they produce and sell, and firms choose the price at which they will sell that product. In such industries, the firm itself must choose which characteristics to give the products that it will sell. In perfect competition, prices change continually in response to supply and demand, whereas in imperfect competition where differentiated products are sold, prices change less frequently. Imperfectly competitive firms often respond to fluctuations in demand by changing output and holding prices constant. Imperfectly competitive firms engage in other forms of non-price competition, such as offering competing standards of quality and product guarantees, ex after-sales services like warranty on cars. Imperfectly competitive firms engage in activities to be designed to hinder the entry of new firms, thereby preventing the erosion of existing profits by entry, ex price matching to any retailer.

Related Questions

13. One of the limitations of Five Forces is that:

a. These tools reduce producer surplus

b. For one firm to increase profit, it takes it from other participants in the industry

c. Does not provide a firm with sustainable competitve advantage

d. both b & c.

15. All these are characterisctics of a monopoly except,

a. There is one seller of the product

b. Has few substitutes

c. Controls a large share of the market

d. Controls a small share of the market

22. Industries with high barriers to entry

a. Pushes profits to normal returns

b. increases the likelihood of firms entering the industry

c. help firms sustain profits

d. increases the number of competitors

14. How does Ebay differ from an economist's view of a perfect competitve market?

a. Ebay has few buyers whereas perfect competitve industry assumes many buyers

b. Ebay has few sellers whereas perfect competitve industry assumes many sellers

c. There is limited information in ebay whereas perfect competitive industry assumes full information for both buyers and sellers

d. There is no difference between these two markets

26. Low cost strategies are usually found in industries where

a. Products are not particularly differentiated

b. Price competion tends to be fierce

c. Both a and b

d. None of the above

Cigarettes - Price Elasticity of demand = - 0.67

A. Cigarettes

B. Alcohol

C. Sodas

D. None of the above

2. The demand for insulin will be ______________ than the demand for a Caribbean cruise in general

a. More elastic

b. More inelastic

c. Less elastic

d. Less inelastic

1. Characteristics of competitive markets

The model of competitive markets relies on these three core assumptions:

1.	There must be many buyers and sellers a few players can't dominate the market.
2.	Firms must produce an identical product buyer must regard all sellers' products as equivalent.
3.	Firms and resources must be fully mobile, allowing for free entry into and exit from the industry.

The first two conditions imply that all consumers and firms are price takers. While the third is not necessary for price-taking behaviour, assume for this problem that a market cannot maintain competition in the long run without free entry.

Identify whether or not each of the following scenarios describes a competitive market, along with the correct explanation of why or why not.

Is the scenario	Competitive?
Dozens of companies produce plain white socks. Consumers regard plain white socks as identical and don't care who manufactures their socks.
In a major metropolitan area, one chain of coffee shops has gained a large market share because customers feel its coffee tastes better than that of its competitors.
Scholastik Inc. owns the U.S. copyright to a popular book series. It is the only company with the legal right to publish books in the series in the United States.
In a small town, there are two providers of broadband Internet access: a cable company and the phone company. The Internet access offered by both providers is of the same speed.

amberfly263

See the question and two answers, give brief your own opinion for each answer( are you agree on disagree with the answer, why?)

Q:This week, we are discussing market types. In this forum, please pick one of the market types that are presented in your textbook and provide your own definition (use your own words) and example. What do you think are the benefits vs. deficiencies of your chosen market type?

Answer 1)

Perfect Competition

This kind of market type stipulates the overall advantage that a market has. In this market, there are many sellers and buyers.These players do not control the price of commodities or services but the prices are controlled by the demand and supply of goods and services. As a result of this, no one can determine the market price of commodities because customers will switch to the next best alternative. All the market players in this sense are price takers and the customers that subscribe to these goods have a lot of experience about the goods offered. It means therefore that they have adequate information about the goods available, which means, therefore, they are aware of the prices that are being charged. All the firms that exist in this kind of market type have a relatively small market share because of the existence of so many of them. The market is also characterized by free entry and exit of firms. New firms can enter the market if they so wish and create competition to the existing firms. Due to this nature of many firms, most of them only earn enough to keep them on the market and nothing more for these firms (Makowski & Ostroy, 2001).

Answer 2)

The Oligopoly; best recognized by few sellers, identical (or similar) products, and its difficult entryinto the market. A good way to determine if a market has an oligopoly is if the change in one seller, causes its "competition" to change likewise. Automotive, cell phone industries, and aviation are some examples of markets that have an oligopoly. In the automotive industry, if one vehicle producer (lets say Chevrolet) changes the body style of its line up, other "completion" is soon to follow. Notice how cars these days are getting nicer and nicer for the base model? Research and Development is greatly valued in an industry that has an oligopoly. This is because if a seller lowers prices, they understand that its competitors will soon follow with ease. But, if they develop a better improvement over its last model in technology, it is much harder to follow than just a reduction in price.

The advantage of an oiligolpoly is that the leaders can set prices instead of take them. Which leads to those that are in charge having the ability to increase profit margins above what they would be in a truly free market.

The disadvantage is that for those looking to try to get into the market will have much difficulty because of the common huge capitol expenditures required to actually compete with the big boys.

ECO100Y5 Lecture Notes - Lecture 11: Imperfect Competition, Perfect Competition, Shampoo

ECO100Y5 Full Course Notes

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