UNIT 3: MICROECONOMICS: MARKETS, PRICES, AND BUSINESS COMPETITION Chapter 9: Competition and Monopolies

Section 1 Perfect Competition

Terms & Names Activity Terms/NamesDefinitionSentencePicture Draw the following table in your notes (right side). For each term/name draw a picture that represents how the item is meaningful to you.

SECTION OBJECTIVES What are the five conditions of perfect competition? Why is agriculture often considered an example of perfect competition? How does perfect competition benefit society?

PERFECT COMPETITION 1.Why do you think all of the apples have similar prices? 2.The land and equipment pictured on the right act as barriers that might make farming less than perfectly competitive. Why?

Market Structure Market structures are a way to categorize businesses by the amount of competition they face. Four basic market structures in the American economy are: – Perfect Competition – Monopolistic Competition – Oligopoly – Monopoly

Processing What types of business face strong competition? Why? What are the four basic structures of the American economy?

Conditions of Perfect Competition 1.A Large Market – Many buyers and sellers 2.Similar Products – The good/service must be nearly identical. 3.Easy Entry and Exit – Sellers in the market cannot prevent others from entering market – The initial investment costs are low – The good/service is easy to learn to produce 4.Easily Obtainable Information – Information about prices, quality, and sources is easy to get. 5.Independence – Sellers or buyers cannot group together to control price. When the above conditions are met, supply and demand control the price.

Processing Why is it difficult for industry to achieve perfect competition? Illustrating Activity – Create an illustration on perfect competition using agriculture as an example. – Write a “brief” explaining your illustration. – Extra Credit if you present it to the class.

Agriculture as an Example The agriculture market is close to a perfectly competitive industry. No single farmer has control over price. Supply and demand determine price. Individual farmers have to accept market price. Demand for agriculture is unique; inelastic.

Processing In what ways does big-business farming not fit the five criteria? Using Graphics Activity – Use a web titled “The Wheat Market as Perfect Competition” – Complete the web by entering the conditions for perfect competition in the wheat market. – Refer to Figure 9.3 on page 236. – Your web should look something like the example on the next slide

The Wheat Market as Perfect Competition

Benefits to Society Price will drop to a level that benefits both consumer and entrepreneur. Economic efficiency Resources are used in most productive manner.

Processing Why might some entrepreneurs prefer to enter markets without perfect competition? Advertising Activity – On your own or with a partner, script a 45 second to 1 minute radio advertisement that explains the benefits of perfect competition. – Broadcast your advertisement to the class for extra credit!!!

MONOPOLIES, OLIGOPOLIES, AND MONOPOLISTIC COMPETITION 1.Why would the government pass laws that reduce competition, as in the case of the U.S. Postal Service? 2.Why would the need for high-cost capital keep people from getting into a market such as the aluminum- producing industry?

Section 2 Monopoly, Oligopoly, Monopolistic Competition

Terms & Names Activity Terms/NamesDefinitionSentencePicture Draw the following table in your notes (right side). For each term/name draw a picture that represents how the item is meaningful to you.

SECTION OBJECTIVES What are four characteristics of a pure monopoly? What characterizes an oligopoly? What are five characteristics of monopolistic competition?

Imperfect Competition Most industries are a form of imperfect competition. There are three types of imperfect competition that differ in how much competition and control over price the seller has.

Processing Why do you think that U.S. industries mainly have imperfect competition? Using Graphics Activity – Use a chart like the one on the next slide to compare the different types of imperfect competition.

MonopolyOligopolyMonopolistic Competition Number of Sellers Product Entry Into Market Control Over Price

Monopoly Most extreme form of imperfect competition – A single seller controls the supply and price of product – No substitutes: no competitor offers good or service that closely replaces what monopoly sells – No entry: a competitor cannot enter the market due to government regulations, large initial investment, or ownership of raw materials – Almost complete control of market price Can raise prices with no fear of competition

Monopoly Natural Monopolies are providers of utilities, bus services, cable, and have economies of scale; producing the largest amount for the lowest cost. Geographic Monopolies are created due to geographic barriers for competition. Technological Monopolies are the result of inventions that are patented and copyrighted. Government Monopolies are similar to natural monopolies but held by the government. Monopolies are far less important than in the past, and don’t last as long.

Processing The United States has many laws preventing illegal practices within a monopoly. Why do you think this is so? In Your Community Activity – Can you think of a monopoly in your community? – What kind of monopoly is it? – Print and glue a picture of the monopoly.

Oligopoly Dominated by several suppliers and a few sellers who control 70 to 80 percent of the market Capital costs are high and it is difficult for new companies to enter market. Goods/services provided by the few sellers are nearly identical. Competition is not based on price, but product differentiation is based on consumer perception of the value of one over the other. All the companies are interdependent – Change in one will affect the others – Interdependence can lead to price wars or the illegal act of collusion or teaming up to raise prices. – Cartels are international groups that use collusion to seek monopoly power.

Processing Airlines are an example of an oligopoly. Explain how they use product differentiation and how they act interdependently.

Monopolistic Competition Numerous sellers Easy entry into market Differentiated product Nonprice competition Some price control by the seller Advertising tries to convince consumers of the superiority of given product, enabling companies to charge more than the market price for a product.

Processing Have you ever been surprised by what some companies are able to charge for a product? Explain how this is possible with monopolistic competition. Research Activity: – Research the Herfindahl-Herschman Index (HHI). How is the index calculated? What does the index measure?

Section 3 Government Policies Toward Competition

Terms & Names Activity Terms/NamesDefinitionSentencePicture Draw the following table in your notes (right side). For each term/name draw a picture that represents how the item is meaningful to you.

SECTION OBJECTIVES What is the difference between interlocking directorates and mergers? What is the purpose of federal regulatory agencies? How has some regulation hurt consumers?

GOVERNMENT REGULATION OF THE MARKET 1.Where on the continuum do command economies fall? 2.What type of regulation do you think a modified free enterprise economy has?

Antitrust Legislation Rockefeller monopolized the oil industry by creating interlocking directorates and putting Standard Oil people on boards of the competition. Sherman Antitrust Act (1890) – Prevented new monopolies or trusts from forming and broke up existing ones. Clayton Act (1914) – Sought to clarify the laws in Sherman Antitrust Act by prohibiting or limiting a specific number of business practices. Federal government must determine whether merging of two companies will significantly lessen competition. – Mergers have to be approved by the government.

Processing Research the break up of AT&T. – Many people feel that the break up of Bell Telephone’s monopoly (now known as AT&T and the baby bells) hurt the consumer. – Do you think the break up hurt consumers? Are government rules restricting monopolies always good? If not, how do you think the laws should be changed so that they are better for American consumers?

Mergers Horizontal Merger – The merging of two corporations in the same business. Vertical Merger – Merging of two corporations in same chain of supply. Conglomerates – Merging of two corporations involved in at least four or more unrelated businesses.

Processing Which type of monopoly might be the most likely to hurt the consumer? Explain your reasoning.

Regulatory Agencies Government makes laws regarding business pricing and product quality and uses regulatory agencies to oversee that various industries and services obey these laws. Deregulation is when the government removes its regulations to increase competition.

Processing Why do you think there are so many different regulatory agencies?