Types of Barriers to Entry

To preserve a monopoly, it is important to keep potential rivals out of the market by setting barriers to entry. Barriers to entry can make a market less contestable. 

Ownership of Scarce Raw Materials 

If a firm has an exclusive ownership over a scarce resource, it has monopoly power over the source and only the firm can exploit it. For example, Microsoft owns the windows operating system brand. 

Patents/Copyright

A government gives or provides a firm/company the sole rights to supply a product, which is copyrighted. Patents and copyright serve the purpose of protecting companies innovations that have been expensive to research and develop. Preventing other firms to produce the same item. 

Advertising and Marketing
Established firms may use advertising as a barrier showing customers and consumers that their product is slightly different from the competitors hence making those new competitors hard to gain acceptance. For example, cars - Audi and BMW. Both competitors will keep inventing new cars and advertise. Audi TT is known for its speed whereas BMW is know for comfort and safety. They will keep coming up with new ideas and creativity to get the customer's attention.













Various types of barriers to entry serves one same purpose which is to make sure their profit will not be jeopardized by other companies. With barriers to entries, firms will not need to worry if another firm might produce a same product. 

Reference

http://www.market-analysis.co.uk/PDF/Academic/barrierstoentryandexit.pdf
http://mises.org/daily/6378/The-Economics-of-World-Government
http://www.economicsonline.co.uk/Market_failures/Monopoly_power.html
http://www.jstor.org/discover/10.2307/1123143?uid=3738672&uid=2&uid=4&sid=21102558043397

International Trade

Absolute and Comparative Advantage

Absolute Advantage

Absolute advantage is the ability of one country or party to produce a better product compared to the competitors by using the same amount of resources. Focuses on the advantage of cost. 

Example, 

UK can produce 100 computers in an hour with 20 employees.

Germany can produce 50 computers in an hour with 20 employees. Both parties are paid a fair amount. It can be obviously seen that UK has an absolute advantage over Germany because it can assemble more computers in the same hour period with the same amount of workers. 

Comparative Advantage

Comparative advantage occurs when a country can produce the same product as the other with a lower opportunity cost of production. But even if one country is better than the other, both countries and parties will still benefit by trading with each other, as long as they have difference efficiencies.

For example,

A worker in China can produce 2 pounds of rice or 3 papaya's in an hour. Opportunity cost of 2 pounds of rice is 3 papaya's vice versa. 1 papaya is 2/3 pound of rice. Opportunity cost for 1 pound of rice is 3/2 of papaya's. 

A worker in Ireland can produce 1 pound of rice or 2 papaya's in an hour. Opportunity cost for 1 papaya is half pound of rice. 

After comparing, opportunity cost for a pound of rice is 3/2 papaya's in China and 2 papaya's in Ireland. Hence, China has a comparative advantage in producing rice. 

On the other hand, the opportunity cost of a papaya is 2/3 a pound of rice in China and 1/2 pounds of rice in Ireland. It shows that Ireland has an comparative advantage in producing papaya's. 

References: 

http://en.wikipedia.org/wiki/Absolute_advantage
http://economics.about.com/od/Gains-From-Trade/ss/Absolute-And-Comparative-Advantage_2.htm

http://www.econlib.org/library/Topics/Details/comparativeadvantage.html

http://mises.org/daily/6158/

http://theconversation.com/the-economics-of-comparative-advantage-and-usain-bolt-video-7988

Price Discrimination

Price discrimination happens when the same goods or products are sold with different prices to different group of consumers. This is also a pricing strategy.

Normally, firms will charge higher prices to the group with a higher price inelastic demand whereas charging a lower price to the group with a more elastic price demand. This is because companies can then achieve a higher profit.

Sample Graph

For example, movie tickets in Malaysia. There are various price range for various age groups. Children below 12 will pay a cheaper price of RM 7 for a movie ticket because they do not have a solid financial income therefore cannot afford services or products that are too expensive because it is out of their budget. Price of movie tickets for adults are much higher such as RM 12. This is because adults are more capable to a proper income. With a different price, they still enjoy the same service. Same cinema seats and movie.






Coupons and Discounts

Giving out coupon and vouchers to customers. For example, Giant may send coupons to their regular customers saying they entitle to a 15% discount off selected products to target on the customers spending habits and trigger them.









Loyalty Cards
Offering rewards such as buy 5 free 1. For example, Ding Tea. If you accumulate and purchase 9 drinks, you get the 10th drink for free. This is to reward those that constantly buy from them and on a high quantity. For one-off visitors, they are liking to be less price sensitive.

References:
http://www.investopedia.com/terms/p/price_discrimination.asp
http://www.economicsonline.co.uk/Business_economics/Price_discrimination.html
http://www.tutor2u.net/blog/index.php/economics/comments/airline-price-discrimination-is-this-an-example
http://en.wikipedia.org/wiki/Price_discrimination
https://www.boundless.com/economics/monopolies/price-discrimination/specific-examples-of-price-differentiation/
http://www.economicshelp.org/blog/7042/economics/examples-of-price-discrimination/
http://www.travelfish.org/blogs/malaysia/2011/12/27/kuala-lumpurs-biggest-scam-discriminatory-pricing-for-foreigners/
http://economics.about.com/b/2008/01/02/real-life-price-discrimination-an-example.htm
http://www.forbes.com/sites/timothylee/2012/06/06/comcasts-obnoxious-price-discrimnation-strategy/
http://www.motherjones.com/kevin-drum/2012/08/price-discrimination

Price Ceiling

Price ceiling is a government-imposed price limit or control on how much the price of product can be charged. With price ceiling, it is illegal to increase a products price higher than its maximum level. Price ceiling is to protect customers from high prices. 

Example Graph

For example, 
Price of a bag of 10kg rice is RM25. If the market equilibrium price rises to RM35, and the government puts a price ceiling of RM40 on it. It will not be effective because it is not protecting people from high prices. Setting a price ceiling means lowering the price below equilibrium such as RM30 to protect consumers.

Misuse of price ceiling can occur if the government thinks the price is too high but the truth is the supply is actually low. 

Example Graph

For example,
Rent control after World War 2. Soldiers returned and started families. They weren't able to keep up with the housing rental. So the government gave a price control, which caused the increase in quantity demand for houses and quantity supplied to decrease. Which means houses were taken as soon as possible and late comers had none.

Price ceiling can create problems and shortage if it is not rationed properly.

Reference:

http://en.wikipedia.org/wiki/Price_ceiling
http://usatoday30.usatoday.com/money/industries/energy/2011-06-06-south-carolina-gas-cap_n.htm?sms_ss=gmail&at_xt=4ded7d7524bc23cf%2C0
http://www.washingtontimes.com/news/2008/jun/12/federal-officials-predict-gas-price-ceiling-at-415/?page=all
http://www.web-books.com/eLibrary/NC/B0/B59/027MB59.html
http://www2.palomar.edu/users/llee/101Chapter08.pdf
http://economics.fundamentalfinance.com/price-ceiling.php

Determinants of Elasticity

Luxuries and Necessities

Luxuries are products and services that are essential in our daily life which has higher elastic demand. 
For example, branded handbags. It is not something we need but WANT to satisfy ourselves.

Therefore, if the price of luxuries increase, the quantity of demand will decrease. Because people have a choice to choose if they want to purchase and have it or not. 

Elastic Graph

Necessities are things and goods that we can't live without. Such as; food, water, electricity and many more.
Necessities have an inelastic demand. If the price increases, the quantity demand will not be affected much. This is because people NEED these goods to live. They do not have a choice to not purchase it.

Inelastic Graph

Availability of Substitutes 

Different goods that almost have the same function or can satisfy the needs of customers, can be used to replace the other. The more substitutes the product has, the more elastic the demand. People can switch product easily because the other replacement product can fulfill the old product's function. 

Example

If the price for Coke increase, the demand for Coke will decrease and the demand for Pepsi will increase. Substitutes are important because customers can make price and quality comparison to make sure their purchase is worth it. 

Reference: 

http://online.wsj.com/article/SB122964131538319975.html

http://economix.blogs.nytimes.com/2009/02/09/luxury-or-necessity/

http://glossary.econguru.com/economic-term/substitute+availability

http://www.transtutors.com/homework-help/micro-economics/demand-elasticity-price/determinants/close-substitutes-availability/

https://www.boundless.com/economics/elasticity/the-price-elasticity-of-demand/closeness-of-substitutes/

http://en.wikipedia.org/wiki/Substitute_good