Cambridge International as and a level Economics Ebook

Barriers
to entry
Figure 7.14 
A competition road map
161
Chapter 7: The price system and the microeconomy 

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SELF-ASSESSMENT TASK 
7.7
Read the feature below and then answer the 
questions that follow.
The telecom industry in Pakistan
Pakistan’s telecommunications industry is one of 
the hottest in the emerging economies of Asia. In 
2002, there were only two million mobile phone 
subscribers; by 2005, this figure had grown to 
around 40 million and by mid-2012, it had soared 
to 125 million. As the market has grown, so too 
has competition. 
Table 7.4
shows the estimated 
market shares of the main providers from 2005 to 
2012.
2005 (%)
2012 (%)
Mobilink 49
30
Warid 14
10
Telenor 11
25
Ufone
21
15
Zong 1
14
Table 7.4
Source: 
BuddeComm Research, Australia, 2013
a
Compare the three-fi rm and fi ve-fi rm 
concentration ratios for 2005 and 2012.
b
Why are these not necessarily good indicators of 
change in the market structure?
c
Discuss how telecommunication companies 
might compete in a growing market like that of 
Pakistan.
■
There is complete freedom of entry into and exit from 
the market.
■
All firms and consumers have complete information about 
products, prices and means of production.
Th
e only industry that comes anywhere near this theoretical 
model is possibly agriculture. Here, there are many buyers 
and sellers and products but the problem in searching for an 
example is in fi nding products that are homogeneous. Most 
real-world markets also have some barriers to entry. Perfect 
competition has a lot of appeal as a yardstick because, if it 
were to operate, there would be consumer sovereignty and 
effi
cient production with no possibility of exploitation.
In perfect competition, the fi rm cannot do anything that 
will infl uence the market price. Each individual fi rm makes 
such a small contribution to output that no alteration in 
its own output can signifi cantly aff ect the total supply. Th
e 
fi rm can choose to produce any quantity it likes and will be 
able to sell all of it at the ruling price. Th
e demand curve 
facing the fi rm is therefore perfectly elastic at this price. If 
the fi rm sells an extra unit of output, it will get the same 
price as the one before. Th
e marginal revenue is therefore 
equal to the price or the average revenue. In 
Figure 7.15
, all 
of the fi rm’s revenue information is in the line:
D 
=
AR 
=
MR
Choosing the output is the only decision that the fi rm has 
to make. Th
is will be done by considering the relevant 
costs of production. Given the assumption that the fi rm 
wants to maximise profi ts, the chosen output will be where 
MC 
=
MR.
Th
e fi rm’s total revenue is the price multiplied by the 
output sold. If the total cost of producing this output is 
lower than the total revenue, then the fi rm will be making 
an abnormal profi t. If TC 
=
TR, then the fi rm would break 
even and be making normal profi t.
It is possible that the costs could be higher than the 
revenue, in which case the fi rm may be about to exit the 
industry. Th
is may not be immediate: a fi rm can continue 
in production making short-run losses, as long as the 
price received by the fi rm covers the AVC, usually the 
cost of paying the wage bill and buying the materials for 
production. Th
is is the shut-down price. Th
e fi rm would be 
making a loss equivalent to the amount of fi xed costs. In 
this situation the fi rm’s only hope is that the market price 
will rise to increase its revenue or that it can take action to 
reduce its costs of production.
Where the revenue is lower than costs in the long 
run fi rms will be leaving the industry. If a lot of them 
do, the eff ect will be a reduction in the overall market 
supply, which will raise the market price, giving the rest