Barriers to entry into a market allow firms to make long run, supernormal profits at the expense of the consumer. With the aid of examples, explain the meaning of the term, barriers to entry?
Barriers to entry into a market allow firms to make long run, supernormal profits at the expense of the consumer. With the aid of examples, explain the meaning of the term, barriers to entry?
Market structures of different industries are affected by how many entrants there are and how many firms exit the industry. There are six main barriers of entry. These barriers prevent competitors from entering an industry. They are:
* Capital Costs: The costs of setting up a business in different industries varies depending on which industry you want to focus your company on, for example building a newsagents is a lot cheaper than to buy a factory because it costs less to build or buy the site of the newsagents than the factory. Capital costs can prevent competitors from entering an industry because, depending on the industry, the costs might be very high.
* Sunk costs: These costs are costs that are un-recoverable. This means that when you spend the money on a sunk product or service, you can't get the money back. An example of a sunk cost is the cost of advertising. Unlike things like machinery or transport, advertising cannot be bought again and again. Another example of a sunk cost would be the cost of food. When food is eaten there is no way that you can sell it again. Competitors would think again if they thought about the sunk costs because this is all money that they give but never in the long run get back. However, for something like advertising it is in a way benefiting the company because it is increasing people's awareness of the product, which leads to more profit. Sunk costs are mainly barriers to exit in a market, because if a company wants to exit an industry and thinks of how much money in the form of sunk costs has been spent, it is like an incentive to stay in the market.
Market structures of different industries are affected by how many entrants there are and how many firms exit the industry. There are six main barriers of entry. These barriers prevent competitors from entering an industry. They are:
* Capital Costs: The costs of setting up a business in different industries varies depending on which industry you want to focus your company on, for example building a newsagents is a lot cheaper than to buy a factory because it costs less to build or buy the site of the newsagents than the factory. Capital costs can prevent competitors from entering an industry because, depending on the industry, the costs might be very high.
* Sunk costs: These costs are costs that are un-recoverable. This means that when you spend the money on a sunk product or service, you can't get the money back. An example of a sunk cost is the cost of advertising. Unlike things like machinery or transport, advertising cannot be bought again and again. Another example of a sunk cost would be the cost of food. When food is eaten there is no way that you can sell it again. Competitors would think again if they thought about the sunk costs because this is all money that they give but never in the long run get back. However, for something like advertising it is in a way benefiting the company because it is increasing people's awareness of the product, which leads to more profit. Sunk costs are mainly barriers to exit in a market, because if a company wants to exit an industry and thinks of how much money in the form of sunk costs has been spent, it is like an incentive to stay in the market.
