Chapter 7.docx

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Paul Cohen

Chapter 7: The Power to Price (Monopoly and Competition) Monopoly: Only sellers of product/service no close substitutes available Market Power: businesses ability to set prices Price Maker: Pure monopoly with maximum power to set prices -Businesses can set any price they chose, but they can’t force consumers to buy. Even monopoly price makers must live by the law of demand. Price Taker: Business with zero power to set price different from market price. Extreme Competition: Many sellers producing identical products/ services. Market Structure: Characteristics that affect competition and pricing power— availability of substitutes, number of competitors, barriers to entry of new competition. -Markets can be defined narrowly on broadly. Move broadly = More substitutes and competition. More narrowly = fewer substitutes and competitors. Product Differentiation: Attempt to distinguish product from competitors products. Fewer competitors = More price power More competitors = Less price power Barriers to entry: Legal or economic barriers preventing new competitors from entering marker. Patents and Copyrights: Exclusive property rights to sell or license creations, protecting against competition. -Patents and copyrights give businesses shot-term monopoly power (incentive for innovation) but eventually expire (balance consumers desire for reasonably priced products/services) Economies of Scale: Average cost of producing falls as quantity (scale) of production increases. Average Total Costs = (Fixed Costs + Variable Costs)
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