Microeconomics and Economic Processes Essay Example | Topics and Well Written Essays - 750 words

When considering a firm’s barriers to entry into a new market, it’s clear that there are a great many factors. While generally, barriers are specific to the industry in which the new firm is attempting to enter, it’s clear that there are a number of overarching elements that most firms face when entering a new market (Clark 1998). One of the primary elements that new firms face is in the realm of advertising. Oftentimes, established firms are able to significantly outspend firms that are wishing to enter the market. This provides established firms with a significant advantage over newly emergent companies and works to differentiate the products to a significant degree. Another major barrier blocking a firm’s entry into a new market is the raising of sufficient capital to buy necessary products or technology. While this barrier is clearly industry-specific, it can surface in terms of financing to buy the business itself, or in start-up costs that are necessary to purchase machines, technology, or patents that will permit full organizational operation. Another barrier is the nature of predatory pricing. This functions when the established firm is able to sell products for prices wherein they take a loss for a period of time as a means of putting the competing firm out of business. Another major barrier to entry into a market is the nature of exclusive relationships with suppliers. In this instance, the established firm is able to sign deals wherein the supplier is only able to sell products to the established firm; in effect making it impossible for new firms to enter the market
The demand curve for a purely monopolistic firm differs from the demand curve for a competitive firm in significant ways (Krugman 2005). One of the important concepts to recognize in this regard is the nature of market power. Market power is understood as the ability of a business or firm to raise prices above the marginal cost level and still retain customers. In firms experiencing a purely competitive market environment, market power is non-existent. In these situations, then, the demand curve for purely competitive firms is a horizontal line. This reflects the nature of market prices as static due to market conditions of pure competition that ensure the market prices don’t rise about the level of marginal costs. Conversely, the demand curve for a firm in a market experiencing pure monopoly is entirely different. In a purely monopolistic market the firm experiences no competition from outside firms. In these regards, the nature of the market is not based on supply and demand but is constituted by the monopoly itself. In these situations, the firm has close to complete power; yet, the firm is still bounded by the price consumers are willing to pay for the product. In pure monopolistic situations, the demand curve is the exact equivalent of the price the firm establishes. This is because consumer demand will decrease with the increased price, yet it is entirely determined by this element, as there are no outside competitive factors.
When considering the nature of productive efficiencies and allocative efficiencies, it’s clear that there are a number of notable differences (‘Productive vs Allocative Efficiency’). In firms or markets that promote productive efficiency measures, the major goal is to produce goods or services for the lowest cost that is possible. In achieving optimal productive efficiency the firm is implementing all of its inputs and workforce to ultimate efficiency measures as a means of driving down product prices to the lowest possible level. Productive efficiency is differentiated from allocative efficiency. Allocative efficiency is concerned with the allocation of resources throughout society. Allocative efficiency recognizes that not all goods that are produced can be utilized by society so that in overproducing goods can negatively affect efficiency levels. The primary difference between these types of efficiency then is the nature of the end goal; with allocative efficiency being concerned with not over-producing objects, as this will result in decreased levels of efficiency. When extending the notion of economic efficiency to market considerations within competitive markets as compared to monopolistic markets, it’s clear that there are notable differences. In these regards, one must consider that market efficiency in a competitive market is contingent on supply and demand prices, such that productive efficiency is a major operating factor. Conversely, in a monopolistic market, the important element is the degree to which the general public is open and receptacle to new products; in these regards, allocative efficiency is the important overriding factor.

Microeconomics and Economic Processes - Essay Example

Extract of sample "Microeconomics and Economic Processes"