Economics Essay Example | Topics and Well Written Essays - 500 words - 25

Economics - Essay Example 80% CR means the four largest firms produce 80% of the total output while the small firms produce only 20%of the output. Hence, the first and second cases can be described as monopolistic competition and oligopoly respectively (Auerbach, 1998). 2. A high CR for an industry shows that a high concentration of the industry is held by the four largest firms. In other words, the industry is concentrated. At the same time, low CR shows that there are many rivals in the industry while none of them have significant market share. This means that there is high competition in the industry. The reasons for the differences in concentration ratio are identified as economies of scale, entry barriers, compliance with an acceptable code of conduct, mergers, government policy, technological change, vertical integration and market growth (Hay and Morris, 1991).Based on these factors, the market for one industry has low CR and other has high CR. In the high CR industries , the entry barriers will be high, there will be established brands and high product differentiation as well as high profits .In the low CR industries, the entry barriers will be low and under favorable price conditions, newcomers will be encouraged here. 3. In the case of industry with 30% CR, when the demand for the product rises and pushes up the price of the good, new firms will enter the market in the long run. This is because the industry is monopolistically competitive. The production will increase and there will be cost stabilization at the initial levels. Consequently, there will be convergence of the profit rate of firms to same competitive return on capital with differences in risk aside in the long run. Thus, in the long run, there is a tendency to move towards perfect competition in this case with CR being very low (Oster, 1994). 4. In the case of industry with 80% CR, when the demand for product increases and pushes up the price, there will be an