MONOPOLIES, OLIGOPOLIES, & COMPETITION

PRIVATE GOODS Private goods – can only be consumed by one person Private goods are subject to the exclusion principle – a person is excluded from using the good unless they pay for it

PUBLIC GOODS Public goods – goods that can be consumed by one person without preventing another from consuming Subject to the nonexclusion principle – no one can be excluded from consumption whether they pay or not

DEALING WITH EXTERNALITIES Gov’t plays a role in handling externalities – the unintended side effect of an action that affects someone not involved in the action (these can be positive or negative)

MAINTAINING COMPETITION Gov’t uses antitrust laws to prevent monopolies (only one provider of a good or service) and preserve and promote competition In 1890, Congress passed the Sherman Antitrust Act which outlawed mergers and monopolies that limit trade btwn states What does perfect competition look like?

COMPETITION VS. MONOPOLY Perfect Competition Number of Firms: Many Variety of Goods: None Control over Prices: None Barriers to Entry: None Examples: Wheat, shares of stock No Control ENTRY

MAINTAINING COMPETITION Why? Competition ensures better quality Gov’t oversees mergers – a combination of two or more companies to form a single business Blocking mergers is an effective way to prevent monopolies from forming

COMPETITION VS. MONOPOLY Monopoly (Natural Monopoly) Number of Firms: One Variety of Goods: None Control over Prices: Complete Barriers to Entry: Complete Examples: Public water Complete Control ENTRY

REGULATING MARKET ACTIVITIES Sometimes it makes sense to have a monopoly  natural monopolies – a market situation in which the costs of production are minimized by having a single firm produce a product Gov’t issues patents giving companies exclusive rights to sell products Franchising allows local authorities (like WCPSS) to give a single firm the right to sell its goods (what soft drinks are sold at sporting events at PCHS?) Industrial monopolies  In rare cases gov’t allows companies in an industry to regulate the number of firms in a market (ex: MLB, NFL, NBA)

Monopoly Decisions in the NFL Los Angeles The second-largest city in the U.S. lost teams to Oakland and St. Louis in The NFL’s 30 team owners voted to give L.A. a new team in March 1999, but withdrew the offer when L.A. could not meet their demands for a new stadium. HoustonThe fourth-largest city in the U.S. lostthe oilers to Tennessee in Anunderdog, Houston beat out L.A. for anew team in October 1999 when itpromised to build a $310 millionstadium and pay the NFL a $700million fee. Cleveland The owner of the Cleveland Browns took his team to Baltimore in After Cleveland built a new stadium with help from NFL loans, the NFL approved a new team for Cleveland in Baltimore In 1984, Baltimore lost the Colts to Indianapolis. With no help from the NFL in sight, the city lured the Browns from Cleveland via a 30- year, zero-rent lease on a new stadium. Renamed the Ravens, the team won the Super Bowl for Baltimore in 2000 by a score of 34-7.

IMPERFECT MONOPOLIES Oligopoly is the term economists use for an imperfect monopoly Instead of one dominant firm, there are a few profitable firms (usually controlling 70%-80% of the output) Barriers to the market are high  patents, brand names, need for investment What keeps oligopolies from banding together to form a “monopoly”? This is called collusion and often results in price fixing  this is illegal in the U.S. and most companies won’t take the chance

OLIGOPOLY Oligopoly Number of Firms: A few Variety of Goods: Some Control over Prices: Some Barriers to Entry: High Examples: Soda, cars, movie studios Some Control ENTRY

THE BUSINESS CYCLE

THE BUSINESS CYCLE - TERMS Real GDP – an economy’s production after the distortions of price have been removed Expansion – a period when RGDP goes up Peak – the highest point in an expansion Recession – a period when RGDP goes down for six straight months

THE BUSINESS CYCLE - TERMS Trough – the lowest point during recession Depression – when recession lasts for more than six straight months

THE BUSINESS CYCLE

OTHER MEASURES OF THE ECONOMY Unemployment rate – the %-age of the civilian labor force (all civilians 16 years old or older who are working or looking for work) who are not working but looking for work Fiscal Policy – changes in gov’t spending and tax policy

OTHER MEASURES OF THE ECONOMY Inflation – a sustained increase in the general level of prices To track inflation the gov’t uses the consumer price index (CPI) – a measure of the price level of 400 various products Dividends – a share of the corporation’s profits distributed to shareholders Capital gain – occurs when stock can be sold for more than it originally cost to buy