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Explain how barriers to entry may affect market structure

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Introduction

* Explain how barriers to entry may affect market structure Barriers are defined as anything that deters entry into an industry or that prevents exit from an industry. Examples of barriers to entry include patents, economies of scale, and trademarks. Market structure is an organizational and characteristic of a market. There are four different market structures that could be used to explain how firms operate. In perfect competition and monopolistic competition, there are no barriers to entry. This means that other firms can enter or leave the industry freely. In oligopoly and monopoly, on the other hand, high barriers to entry exist and this prevents other firms from entering the industry. ...read more.

Middle

As more and more firms enter the industry, the supply curve for the product will start to shift to the right (because more firms begin to supply the same product). This would decrease the price of the product thus shifting the demand curve downward in PC and leftward in MC. Because there are no barriers protecting incumbent firms and restricting competition, there is high level of competition in the industry since firms have to compete against each other to sell identical (in PC) or slightly differentiated products (in MC). As the industry is dominated by many small firms, individual firms have no market power and are called "price takers" meaning that they have to sell their products at the going market price. ...read more.

Conclusion

short run, the period of time in which at least one factor of production is fixed, and the long run, the period of time in which all factors of production are variable (but the state of technology is fixed). Due to these significant barriers to entry, firms in monopoly and oligopoly maintain their power and are able to restrict competition in the market. As a result, the existence of market power is aided by barriers to entry. In conclusion, barriers to entry affect the characteristic of the market. Firms in PC and MC do not have market power and there is an existence of competition in industry whereas firms in OL and MN have monopoly power and are able to restrict competition. ...read more.

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