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Lecture 8

HIS109Y1 Lecture 8: Lecture 8 - Monopoly to Competition and In Between


Department
History
Course Code
HIS109Y1
Professor
Kenneth Bartlett
Lecture
8

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ECO105: November 23rd
PRICING POWER: MONOPOLY TO COMPETITION AND IN BETWEEN
Price Makers And Price Takers:
Busiesses ai for oopoly’s eooi profits ad prie-making power. Competitors usually push
businesses toward the normal profits and price taking of perfect competition.
Monopoly:
o Only seller of product or service; no close substitutes available.
o Demand curve is steep and inelastic.
Market Power:
o Busiesses’ aility to set pries.
Price Maker:
o Monopoly with maximum power to set prices.
Moopoly’s Ielastic Dead (Fig. 8.1):
Businesses can set any price, but cannot force consumers to buy.
o Even monopoly price must live by law of demand.
Perfect Competition:
o Many sellers producing identical products or services.
o Demand curve is horizontal and perfectly elastic at the market price.
Price Taker:
o Business with zero power to set prices.
Perfectly Elastic Demand for an Individual Business in Perfect Competition (Fig 8.2):
Market Structure:
Priig poer depeds o the opetitieess of a usiess’s arket struture available substitutes,
number of competitors, barriers to the entry of new competitors and on elasticity of demand.
Market Structure:
o Characteristics affecting competition and pricing power.
Available substitutes.
Number of competitors.
Barriers to entry of new competitors.
o Broader definition of market = more substitutes and competitors, more elastic demand, less
pricing power.
o Narrower definition of market = fewer substitutes and competitors, more inelastic demand,
more pricing power.
Product Differentiation:
o Attempt to distinguish product or service from those of competitors.
Reduces competition and substitutes, increase pricing power.
Can be actual differences or perceived differences.
o Pricing power and number of competitors.
Fewer competitors = more price power.
More competitors = less price power.
Barriers to Entry:
o Legal or economic barriers preventing new competitors from entering a market.
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