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ECON 208 Chapter Notes -Monopolistic Competition, Productive Efficiency, Allocative Efficiency

Course Code
ECON 208
Lee Ohanian

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Adrienne Pacini ECON 208 WEEK: October 27, 2009
Chapter 11
The Structure of the Canadian Economy
Industries with Many Small Firms
- The majority of industries in Canada are made up of firms that are small relative to the size
of the market in which they sell
- Individual firms are price takers and produce more-or-less the same product
- No barriers to entry or exit
- Each store has a unique location that may give it local market power
Industries With a Few Large Firms
- Industries dominated by either a single firm or a few large ones
- Oligopoly structure
- Firms engage in competitive behaviour and produce a range of products that are
differentiated form each other and from the products of other large firms
- Most modern industries that are dominated by large firms contain several firms
- Examples: Ford, Toyota, and General Motors
Industrial Concentration
- Concentration ratio: the fraction of total market sales controlled by a specified number of
the industry’s largest firms
o Often used as an indicator of market power
- Defining the market: the main problem associated with using concentration ratios is to
define the market with reasonable accuracy
o This process is difficult
What range of products should be included?
What is the relevant geographical area?
Imperfect Competition
Firms Choose Their Products
- Differentiated product: a group of commodities that are similar enough to be called the
same product but dissimilar enough that all of them do not have to be sold at the same
o Most firms in imperfectly competitive markets sell differentiated products
o The firm itself must choose which characteristics to give the products that it will sell
Firms Choose Their Prices
- Administered price: a price set by the conscious decision of the seller rather than by
impersonal market forces
- Price setter: a firm that faces a downward-sloping demand curve for its product
o It chooses which price to set
- Other than in perfect competition, firms set their prices and then let the demand determine
the sales
Non-Price Competition
- Firms can increase their market share by using non-price competition
o Advertising
o Differences in quality of products and/or level of customer service
o Create entry barriers to protect current pure profits
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