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Economic Factors

In: Business and Management

Submitted By mcocciante
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Economic Factors

AIU Online

Abstract

Before writing a business plan for a new business it is important to research the type of industry this proposed business will enter. This paper will discuss two in particular which are an Oligopoly and a monopolistically competitive industry.
Economic Factors
Concentration Ratio (CR) is calculated using the total sales accounted for by the four largest firms in the industry. Industry A which has 20 firms and a Concentration Ratio (CR) of 30% is considered to be monopolistically competitive industry. This means there are many producers and consumer in the industry. The main characteristics of a monopolistic competition are; Ease of entry, many producers and consumers where no one business has total control over the market, and producers have some control over price. If the demand for the product rises and pushes up the price for the good, in the long run, new firms would come into the market. This would cause prices to come back down as competition increases and eventually there would be price equilibrium.
Industry B has 20 firms and a Concentration Ratio (CR) of 80% is considered to be an Oligopoly. There are three main characteristics of an oligopoly. The first is that it is comprised of a small number of large firms. The second is identical or differentiated products which means while some oligopolies produce identical use of raw materials to make products used by other industries while others concentrate on products that revolve around consumer wants and needs. This third characteristic of an oligopolistic industry is that they have control over market share which makes it difficult for a new business to enter. (Krugman & Wells, 2009)

If there was an increased demand for products as well as increase in prices in this type of industry, the firm could expect to adjust in size in order to maximize

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