 What is a monarchy?  What is an oligarchy?  What is the goal of the game monopoly?  If two teams are being picked for a sports competition, how can you make sure the game is fair?  How many soft drink companies control the market?  How many computer companies control the market?  Besides price, what else do you look at when deciding between two different brands of the same product?

 Target F: I can describe the effects of competition on producers, sellers, and consumers  Target G: I can explain why monopolies or collusion among sellers reduces competition and raises prices

 Babies are born without knee caps. They don’t appear until the child reaches 2-6 years of age.  On April 15 th 1912, the SS Titanic sunk on her maiden voyage and over 1,500 people died. Fourteen years earlier a novel was published by Morgan Robertson which described a ship the same size as the Titanic which crashed into an iceberg on a misty April night. The name of Robertson’s fictional ship was the Titan.  There are 92 known cases of nuclear bombs lost at sea.

 Competition among producers and sellers leads to more choices, improved quality, and lower prices as producers seek to attract customers away from other businesses  Competition among consumers leads to higher prices and allocates goods to those willing to pay the most (e.g., several buyers bidding at an auction push the price up)

 An industry is a distinct group of productive or profit-making enterprises sharing similar products or services (e.g., the automobile industry)  The level of competition in an industry is affected by the ease with which new producers can enter the industry and by consumers’ information about the availability, price, and quantity of substitute goods and services

 Perfect Competition: A market structure in which a large number of firms all produce the same product, and no single seller controls supply or prices › There are factors that prevent perfect competition in most markets

 For perfect competition there must be four conditions: 1) Many buyers and sellers in the market 2) Sellers offer standardized products (nearly the same) 3) Buyers and sellers must be well informed 4) Sellers must easily be able to get into and out of the market

 If there are too few sellers, one seller’s actions would have a great impact on the whole market  Example: One seller raises its prices, buyers will go buy from other sellers

 Products must be the same or nearly the same  This means that buyers would be swayed by price alone, not the special features of a product  A product that is pretty much the same regardless or who makes or sells it is a commodity  Example: Corn grown in one field is pretty much the same as the corn grown in another field

 They know all there is about the product they are buying or selling  Who else is selling, at what price are they selling, and how much is being sold

 In a free market, there can be no barriers to entry  Barrier to Entry: any factor that makes it difficult for a new firm to enter a market  No government controls and no labor unions  If profitable, businesses can join- if losing money businesses can leave when they want

 Any market structure besides perfect competition  Two biggest factors that prevent perfect competition are start-up costs and technology › Many businesses have high start-up costs › It takes years of training to gain technical skills

 A condition when there is no competition in the market  A pure monopoly has three characteristics › There is only one seller › There are no close substitutes › Getting into and out of the market is difficult

 Economies of scale: Factors that cause a producer’s average cost per unit to fall as more units are produced  Example: A hydroelectric plant will spend billions building a dam. The average cost of the first unit of electricity is high, but it will steadily drop

 Government Monopoly: a form of monopoly in which a government agency or government corporation is the sole provider of a particular good or service and competition is prohibited by law. › Can exist at any level of the government › Examples: law and the legitimate use of physical force.

 Government Granted Monopoly: When the government grants exclusive privilege to a private individual or firm to be the sole provider of a good or service › Potential competitors are excluded from the market by law, regulation, or other mechanisms of government enforcement › Public utility services such as public roads, mail, water supply, and electric power, as well as certain specialized and highly regulated fields such as education and gambling

 Many companies compete to sell products that are almost the same  Each firm has a monopoly over its own product  Key difference: The goods are enough alike that they can be easily substituted for one another  Example: Pizza Parlors

 Conditions: › Many firms › Few Barriers to Entry › Little Control over price › Differentiated products

 Non-price Competition: a way to attract customers through style, service, or location, but not lower price  Physical Features: New color, size, shape, or taste  Location: Some products will sell better in some areas as opposed to others  Service Level: When a seller can offer more services than others it will profit more  Advertising: Firms use advertising to show that their product is different than others

 An oligopoly is a market structure in which a few large firms dominate the market  Three main features › Few sellers in the market: Four largest firms produce at least 70 to 80 percent of the output › A nearly standardized product: Products are nearly the same, with minor differences › Difficulty entering the market: High start-up costs, expensive to maintain, tough to break customer loyalty

 The price each seller sets depends on the price the other sellers set  If one seller cuts prices it will set off a price war  Each seller will then continue to decrease prices to gain control  Sometimes they set prices so low that profits for the whole industry start to fall

 Collusion: An illegal agreement among firms to divide the market, set prices, or limit production › Each firm is guaranteed a market with little competition  Collusion is illegal in the United States!!!!

 Price Fixing: An agreement to sell products for the same or similar prices › The price is normally set higher than the price would be in a truly competitive market  Cartels: A formal organization of producers that agree to coordinate prices and production › Do not usually last long because they cheat and when they produce more prices drop

 Market Power is the ability of a firm to control prices and total market output  If one firm, or a few large ones, control a market, it often has higher prices and lower output  Predatory Pricing: A firm sells a product below cost for a short period of time to drive competitors out of the market

 Trust: An illegal grouping of companies that discourages competition  Merger: When two or more companies join to form a single firm

 Put in place antitrust laws to encourage competition in the marketplace  Puts forward effort to stop monopolies from forming  Can block mergers if it predicts the merger will have negative impacts on the market and create a monopoly

 Deregulation: The removal of some government control over markets  Mixed Success: › Allowed more firms to appear in the airline industry which drove down prices for consumers › Revenues have dropped and some firms went out of business and many lost their jobs

 Go to a Grocery Store sometime in the next two weeks  Pick 8 different products  Count how many different sellers there are for these products  Organize by number of sellers  Write a brief explanation about your findings