Unit 2: Macroeconomics

ECONOMIC FACTORS Lottie Bazmore ECON224 Michael Luzius, Instructor April 3, 2011

Unit: 2 Economic Factors Abstract In economics, the concentration ratio of an industry is used as an indicator of the relative size of

firms in relation to the industry as a whole. This is also used to determine the market form of the industry. The four-firm concentration ratio is used in the United States economic community, which consists of the market share percentage of the four largest firms in the industry (Krugman, 2009).

Unit: 2 Economic Factors

You want to start a company, and are trying to decide between two different industries. You are doing your final research before you write your business plan. Industry A has 20 firms and a CR of 30% What is the name for this type of industry? This can be classified as a monopolistic competition (real competition), for it has a CR below 40%. Describe some of this industrys characteristics. The product could be in the agricultural industry and is standard (homogenous), where there are many competitors and no one appears to have a dominant position in the market. It has no barrier to entry or exit, and no market power due to competition. Number of firms varies from 1 to thousands (Luzius, 2011). If you were in this industry and there was an increased demand for the product that pushed up the price of goods, what long-run adjustments would you expect? You would see other firms enter into the market. With increase of goods, the cost would go back to the previous level and the profits of all firms would be the same in the long run (BrainMass.com,2004) What does your anticipated adjustment process imply about the CR for the industry? With all the competition in the market, if profit rates reduce to zero, it would become a perfect competition. The concentration ratio would be very low (BrainMass.com, 2004). Industry B has 20 firms and a CR of 80%. What is the name for this type of industry? This can be classified as an oligopoly, with a CR above 40%, and leaning toward a monopoly.

Unit: 2 Economic Factors Describe some of this industrys characteristics. Number of sellers is small and because of the rate of competition each is aware of the actions of the others. The decisions of one

firm influence the others. Sometimes the actions of one collude to raise prices and restrict production in the same way as a monopoly. They are competitive by trying to corner the market. Entry into this market is very difficult because of the large capital investment, too costly to get in. The product can be unique or differentiated to the market. The company would then try to convince the consumer that one product is different (better), than the other when they are essentially the same. They do have significant marketing power. Examples of this kind of corporation are Microsoft, oil companies, water and electric companies (Luzius, 2011). What are some reasons why this industry has a high CR while Industry A had a low CR? The market is limited in number, entry cost is very high, and one company may set price for industry as a whole, this practice is called price leadership (Krugman, 2009). Is it possible for smaller firms to thrive and profit in Industry B? Why or why not? If there were technological reasons, or legal restraints, (via licenses or patents) this creates monopoly power by preventing competitors from copying product innovations (for at least 20 years). It would be difficult for smaller firms to thrive and profit in such an industry (Luzius, 2011).

Unit: 2 Economic Factors

References barriers to entry. (2009). A dictionary of business and management. (Ed.). Jonathan Law. Oxford University Press. Oxford Reference Online website. BrainMass.com. (2004). Retrieved March 30, 2011, from <asdfasd>http://brainmass.com</asdfasd> concentration ratio (2006) In collins dictionary of economics. Retrieved March 30, 2011, from Credo Reference website. Krugman, P., Wells, R. (2009). Economics. (2nd Ed.). Worth. Princeton University Press. Retrieved March 30, 2011, from AIU Online, Virtual Campus, ECON224 Macroeconomics ECON224-1101B-19 website. Luzuis, M. (2011, March 29) Live Chat posting. Retrieved March 29, 2011, from AIU Online, Virtual Campus. Second week chat, Session 1. ECON 224-1101B-19 website. market concentration. (2006). In collins dictionary of business. Retrieved March 30, 2011, from Credo Reference website.