Chapter 8 (PRICING POWER)

Question 1

Monopoly

Answer 1

-single seller of product or service
- no close substitutes (steep inelastic demand)
- price maker
- maximum pricing power (complete control over market)
- market power is still limited by the consumer’s willingness and ability to pay
- high barriers

Question 2

Oligopoly

Answer 2

• few big sellers control most of the market
• price maker
• not as much pricing power
• differentiated substitutes (Ex: Apple and Samsung)
• medium barriers to entry
• inelastic demand

Question 3

Perfect Competition

Answer 3

• many sellers producing identical products or services
• no barriers to entry
• price taker
• demand is perfectly elastic (horizontal on graph)
• perfect substitutes

Question 4

Monopolistic Competition

Answer 4

• many small businesses make similar but slightly differentiated products or services
• differentiated substitutes (ex: restaurants, piercing parlours)
• price maker (limited pricing power)
  -no barriers to entry
• elastic

Question 5

Market structure

Answer 5

• characteristics that affect competition and a business pricing power

Factors:
1. Available substitutes
2. Number of competitors
3. Barriers to entry of new competitors

• more substitutes and competitors = more elastic demand = less pricing power
• fewer substitutes and competitors = more inelastic demand = more pricing power

Question 6

Product differentiation

Answer 6

• attempt to distinguish product or service from those of competitors
• allows seller to reduce competition and substitues which increases price power
• can take the form of actual differences or perceived differences

Question 7

Economies of scale

Answer 7

economic barriers - average total cost of producing decreases as quantity (scale) of production increases

• usually exists in perfect competition

Question 8

Average total cost

Answer 8

Total cost per unit of output

Question 9

Higher pricing power

Answer 9

=more inelastic demand
- consumers have few substitues or strong brand loyalty

Question 10

Lower pricing power

Answer 10

= more elastic demand
- consumers have many substitutes or no brand loyalty

Question 11

5 factors of competition

Answer 11

1. Cutting costs
2. Improving quality and product innovation
3. Advertising and brand loyalty
4. Eliminating competition
5. Building barriers to entry

Competition: active attempt to increase profits and gain the market power of monopoly

Question 12

Creative destruction

Answer 12

• competitive business innovations generate economic profits for winners, improve living standards for all but destroy less productive or less desirable products and production methods
• competitive actions by businesses can have the unintended consequences of business cycle up and down fluctuations of overall economic activity
• responsible for moving jobs offshore