Market Structures Chapter 7

Perfect Competition, 7.1 I. Perfect Competition is a market structure in which a large number of firms all produce the same product

II. Four conditions for perfect competition A. Many buyers and sellers participate in the market B. Sellers offer identical products 1. Commodity a product that is considered the same no matter who produces it a. Feed corn for cattle is a commodity

Four Conditions for Perfect Competition C. Buyers and sellers are well informed about products 1. A buyer is not willing to spend a lot of time and energy researching the market when the savings to be made are small D. Sellers are able to enter and exit the market freely

III. Barriers to Entry A. Start-up costs the expenses a firm must pay before it can begin to produce and sell goods 1. An entrepreneur wishing to own a clothing store must rent a building, hire workers, and buy clothing for the business 2. A person who wishes to practice medicine is required to attend medical school, complete an internship, and pass a state exam.

Barriers to Entry  Technology  Cable companies must lay miles of underground cable before they can serve a single customer in a new market  One of the effects that the Internet has had on business is that it reduced start-up costs for many businesses

IV. Price and output A. Companies in a perfectly competitive market have no control over price B. Price war is a series of competitive price cuts that lowers the market price below the cost of production

Describing monopoly A. Monopoly a market dominated by a single seller

II. Forming a monopoly A. Economies of scale 1. Firms enjoy economies of scales when its average total cost will decrease as production increases. 2. An example of economies of scale is a ranch increases its profits by expanding from 400 to 800 cattle without buying or renting additional land

B. Natural monopolies 1. Natural monopoly a single firm supplies all the output. a. Natural monopoly is most efficient when one large firm supplies all of the output b. Natural monopolies in the past 30 years 1. Electricity 2. Water 3. Phone service

III. Government monopolies A. Patents, franchises, and licenses can lead to monopolies

B. Technological monopolies 1. Patent a license that gives the inventor of a new product the exclusive right to sell it for a certain period of time a. The government sometimes gives monopoly power to a company by issuing a patent because it makes a product better than anyone else’s

C. Franchises and licenses 1. Franchise the right to sell a good or service within an exclusive market 2. License a government-issued right to operate a business

D. Industrial organization 1. One kind of monopoly that the U.S. government generally permits, is professional sports leagues

IV. Output decisions A.The monopolist’s dilemma

B. Marginal revenue 1. A monopolist will set its production at a level where marginal cost is equal to marginal revenue.

C. Setting a price 1. In a monopoly market, the market price will be greater than the price in a perfectly competitive market.

V. Price discrimination division of customers into groups based on how much they will pay for a good A. Companies practice price discrimination because they recognize that groups of consumers are willing and able to pay different amounts and maximizes profits by charging each group a different price.

Monopolistic Competition and Oligopoly, 7.3 I. Monopolistic Competition: Many companies selling similar but not identical products A. Companies that sell book bags are examples of monopolistic competition

II. Four Conditions of Monopolistic Competition A.Many firms B.Few artificial barriers to entry C.Slight control over price D.Differentiated products 1.Differentiation: Making a product unlike other products

III. Non-Price Competition A. Physical characteristics B. Location C. Service level D. Advertising image

IV. Price, Output, and Profits A.Prices 1.If a monopolistically competitive firm begins to charge an excessive price for its products, consumers will substitute a rival’s products B.Output C.Profit D.Production costs and variety 1.Many firms will earn profit in the short term, but they must constantly innovate and compete to earn profits in the long term in a monopolistically competitive market.

Oligopoly V. Oligopoly: a market structure in which a few large firms dominate a market. A. Also an oligopoly is two to four firms producing 70 to 80 percent of the output B. Example of an oligopoly: 1. Sunshine Island has three large supermarkets that supply most of the island’s population. A gas station also sells a very small selection of groceries.

Oligopoly C. Barriers of entry D. Cooperation and collusion 1. Price war a series of competitive price cuts that lowers the market price below the cost of production E. Cartels are difficult to operate because they work only if members keep to their agreed output.

Regulations and Deregulation, 7.4 I. Market Power II. Government and Competition A. Trust: an illegal grouping of companies that discourages competition 1. Sherman Antitrust Act: The federal government won the power to prevent monopolies and mergers that interfered with competition B. Regulating business practices B. Regulating business practices

C. Breaking up monopolies 1. These companies have been forced to split up by the federal government a. AT&T b. American Tobacco Company c. Standard Oil Trust

D. Blocking mergers 1. Merger combination of two or more companies into a single firm E. Preserving incentives

Deregulation III. Deregulation the removal of some government controls over a market A. When the government deregulates a product or service, some government regulations over the industry are eliminated. B. Airlines have been deregulated in recent years