Market Structures Ch. 7

Sec. 1: Perfect Competition Definition: Perfect competition – aka: pure competition Four Conditions for perfect competition – Many buyers & sellers in the market No one buyer or seller is large enough to dominate the market and mess with prices – Sellers offer identical products Commodity: a product that is considered the same regardless of who makes or sells it Think about it a second. What things do people buy where price is the only thing considered? You could care less about who made it. – Gasoline – Notebook paper – Lettuce Take a minute and think of two more examples. – Buyers & Sellers are well informed about products No secret deals – Sellers are able to enter & exit market freely Mainly talking about barriers to getting into the market

Consider Chapter 7: Market Structure  What does a bushel of wheat have in common with a share of Microsoft stock?  What’s so perfect about perfect competition?  Why don’t more monopolies last?  Why are some panty hose sold in egg-shaped cartons?  Why was OPEC created?  Is the U.S. economy more competitive now than it used to be?

Objectives Ch 7 : Perfect Competition & Monopoly – SWBAT,  Distinguish the features of perfect competition.  Describe the barriers to entry that can create a monopoly.  Compare and contrast the market structures of monopoly and perfect competition in terms of efficiency.

Key Terms Market structure Perfect competition Commodity Monopoly Barriers to entry Start-up costs Market power

 Market structure – important features of a market, including the number of buyers and sellers, product uniformity across sellers, ease of entering the market, and forms of competition  Perfect competition – a market structure with many fully informed buyers and sellers of an identical product and ease of entry  Commodity – a product that is identical across producers

Example Markets w/ Perfect Competition (at least close examples)  Trading of stocks  Foreign exchange markets  Trading of agricultural products

Market Structure Market FeatureQuestions to Ask 1.Number of buyers and sellers Are there many, or only a few, or just one? 2. Product’s uniformity across suppliers Do firms in the market supply identical products, or are products differentiated across firms? 3. Ease of entry into the market Can new firms enter easily, or do natural or artificial barriers block them? 4. Forms of competition among firms Do firms compete based only on price, or are advertising and product differences also important?

Market Price & Output The market price is determined by the intersection of the market demand curve and the market supply curve. Perfectly competitive markets are efficient – Competition keeps prices & production costs low – Prices correctly represent the opportunity cost of each product

Market Equilibrium & a Firm’s Curve in Perfect Competition

Objective Reflection Ch 7 : Perfect Competition & Monopoly – SWBAT,  Distinguish the features of perfect competition.

Sec 2: Monopoly  Monopoly – exists when the sole supplier of a product with no close substitutes  Market power – the ability of a firm to raise its price without losing all sales to rivals

Barriers to Entry create Monopolies 1.Start-up costs – Low start-up costs mean many entrepreneurs can enter the market Restaurants Convenience stores Hair & Nail salons – High start-up costs limit the number of entrepreneurs that can start a competitive business Technology, knowledge, or skill can add to start-up costs – Computer industry – Carpentry – Plumber High Fixed costs can add to start-up costs – Airlines – Automobiles

Barriers to Entry create Monopolies 2.Economies of Scale (p. 157) ATC Without Economies of ScaleWith Economies of Scale

Barriers to Entry create Monopolies 3.Government create legal restrictions – Patents Drug companies most obvious example – Franchise Can you think of one in this school? (At least for freshmen, sophomores, and juniors) – License TV & radio 4.Control of essential resources – OPEC

Monopolists may not earn a profit Although a monopolist is the sole producer of a good with no close substitutes, the demand for that good may not be great enough to keep the firm in business.

True Monopolies are Rare A profitable monopoly attracts competitors & substitutes Examples  Railroads – trucking industry  Local Cable TV service – satellite TV  Local phone service – wireless & internet  U.S. Postal Service – fax machines, , FedEx, UPS

Monopoly & Efficiency Not guaranteed a profit Can lose money Relatively rare

Monopoly vs. Perfect Competition  Competition forces firms to be efficient and to supply the product at the lowest possible price  Monopolies may grow inefficient  A monopoly will charge a higher price than competitive firms  With monopoly, consumer surplus shrinks, and is much smaller than consumer surplus with perfect competition.

Monopoly Might Not Be So Bad Economies of Scale Government Regulation Keeping prices low to avoid regulation Keeping prices low to avoid competition

Objective Reflection Describe the barriers to entry that can create a monopoly.

Sec 3 Monopolistic Competition & Oligopoly Key Terms: – Monopolistic competition – Differentiation – Nonprice competition – Oligopoly – Price war – Collusion – Price fixing – Cartel

Monopolistic Competition Characteristics – Many firms – Few artificial barriers to entry – Slight control over price – Differentiated products

Comparison of Market Structures p. 170 Perfect Competition Monopolistic Competition OligopolyMonopoly # of FirmsMany A few dominate One Variety of goods NoneSome None Control over prices NoneLowSomeComplete Barriers to entry NoneLowHighComplete ExamplesWheat, shares of stock Jeans, booksCars, movie studios Public water companies

Objective Reflection Compare and contrast the market structures of monopoly and perfect competition in terms of efficiency.

MonopolyOligopoly Similarities Unique to Monopolies Unique to Oligopolies

Perfect Competition Monopolistic Competition SimilaritiesUnique to Perfect Competition Unique to Monopolistic Competition