Effects Of Abnormal Profits On The Long Run Essay

1) An Oligopolistic market structure is a structure where very few large businesses sell a particular standard Good or differentiated Good, and to whose market entry proves difficult. This in turn, gives little control over product pricing because of mutual interdependence (with the exception of collusion among businesses) creating a non-price competition meaning they are the ‘price setters’. A good rule to help classify an

Normal return is the minium profit that is required to cover the costs of inputs and all of expenses associated with it. Economic profit is a forgone profit and not and economic profit which is the biggest difference between the two types of profits.

Hint : Typically, in a monopolistic competition industry, if one company increases price, the other company also increases their price to make more revenue in the long term.

As illustrated by Sloman and Hinde (2007), an Oligopoly by nature has price stability, even when there has been no collusion between firms. This theory is based on two assumptions. For example, if Tate and Lyle were to lower their prices, British Sugar and the other rivals would feel the need to follow suit to prevent losing customers to Tate and Lyle. Contrastingly, if British Sugar raised their prices, Tate and Lyle would not follow suit. They would keep their prices the same and gain customers from British Sugar. The kinked demand model illustrates this.

In these circumstances, the cost structures are not the same as with the competitive industry and so we cannot say that the oligopolistic firm results in higher prices than if a competitive market structure were to be adopted. In fact going along the theory of the downward sloping cost curve we can come to the conclusion that it would be the other way around and consumers would

Recall that firms produce output using four kinds of resources—natural resources, labor, capital, and entrepreneurial ability. The owner of the firm supplies some of the resources that the firm employs. Normal profit is the return to the entrepreneurial ability and other resources supplied by the firm’s owners. If this profit is not as large as those individuals could earn in their best alternative situation, they will switch the resources to that alternative. So, we can think of normal profit as being the minimum return, or cost, that is necessary to keep the firm running.

Barriers to entry - Sunk cost, technology, economies of scale, limiting pricing and brand loyalty of incumbents can all be barriers

Competition within the industry as well as market supply and demand conditions set the price of products sold.

A profitable industry will attract more companies seeking the achievement of profits. If the entrance barriers are low and it is easy for these new competitors to enter the market, the firms already competing in that market will be under a higher risk of decreasing their profits, since more competition will lead to a rise in the market quantity produced, without an increase in consumer demand. This means that the prices practiced will drop and the profit faced before might not be the reality of those firms anymore. The Threat of New Entrants is one of the forces that shape the competitive structure of an industry. In ALDI’s industry situation, a high investment would be required for a new company to join the market, making the entrance barriers high and positively affecting ALDI in the long run. Besides, ALDI had built a brand and developed customer loyalty, which makes even harder for new competitors to compete. Loyalty is a value difficult for a company to build, but it is even more difficult for competitors to overcome it and change the consumer’s mind. Threat of New Entrants is definitely a force that has a positive impact in ALDI’s

In oligopoly market, each firm has substantial market power with high degree of interdependence. The key for success in a oligopoly market is to gain more market share than the competitors. Increasing the price can lead to loss of market share to the competitors, so in the oligopoly market, if a firm decreases the price, the other firms will always follow, but if a firm increase the price, the other firms will not follow. The demand curve is kinked.

The industry in which the company operates can be characterized as monopolistic competition. This is because, since there are no barriers to entry in this industry, threats of entry by potential entrants has made the industry some-what competitive. But the brand loyalty gained by the firms through massive advertising has rendered the firms within

The purpose of this report is to analyze the opportunity to produce plastic components for cartridge production and choose the best alternative. It is predicted that the annual demand growth is a triangular distribution with a minimum of 5%, most likely of 17% and a maximum of 25%. Due to the continuous growth in the demand, the alternatives cannot be compared using just the data for 2010. An analysis is carried out for the time period 2011 to 2015 and the present worth of the net income is considered as the criteria to select the alternative. The analysis basically can be divided into 5 steps:

The efficient market, as one of the pillars of neoclassical finance, asserts that financial markets are efficient on information. The efficient market hypothesis suggests that there is no trading system based on currently available information that could be expected to generate excess risk-adjusted returns consistently as this information is already reflected in current prices. However, EMH has been the most controversial subject of research in the fields of financial economics during the last 40 years. “Behavioural finance, however, is now seriously challenging this premise by arguing that people are clearly not rational” (Ross, (2002)). Behavioral finance uses facts from psychology and other human sciences in order to

there are a number of different buyers and sellers in the marketplace. This means that we have competition in the market, which allows price to change in response to changes in supply and demand. Furthermore, for almost every product there are substitutes, so if one product becomes too expensive, a buyer can choose a cheaper substitute instead. In a market with many buyers and sellers, both the consumer and the supplier have equal ability to influence price.

Competition within the industry as well as market supply and demand conditions set the price of products sold.