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 ENTRY No Control

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 (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 Cleveland The owner of the Cleveland Browns took his team to Baltimore in 1995. After Cleveland built a new stadium with help from NFL loans, the NFL approved a new team for Cleveland in 1999. Los Angeles The second-largest city in the U.S. lost teams to Oakland and St. Louis in 1995. 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. Houston The fourth-largest city in the U.S. lost the oilers to Tennessee in 1996. An underdog, Houston beat out L.A. for a new team in October 1999 when it promised to build a $310 million stadium and pay the NFL a $700 million fee. 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 ENTRY 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

Monetary Policy vs. Fiscal Policy Controlling the supply of money and the cost of borrowing money (credit) according to the needs of the economy Controlled by the Federal Reserve Fiscal Policy Changes in government taxing and spending according to the needs of the economy Controlled by the President and Congress

How does the Federal Reserve Work? The Federal Reserve is the central bank of the U.S.  this is where banks go to borrow money so that you can get money out of the ATM or cash a check! Board of Governors  7 members appointed by the president & confirmed by Congress to serve 14-yr. terms Federal Open Market Committee  affect the economy by manipulating the money supply Federal Advisory Committees  councils that keep the Fed informed of developments in the economy 12 District Banks  monitors and reports on economic & banking conditions in its district 4,000 Member Banks  all nationally chartered banks (like Bank of America or Wells Fargo) are required to join the Federal Reserve System

How is Fiscal Policy Made? Remember, fiscal policy is all about how much the government taxes us and then spends our tax dollars! Step 1 – The Office of Management & Budget (OMB)  the OMB prepares the federal budget on behalf of the president Step 2 – The Congressional Budget Office (CBO)  the CBO reviews the budget and reports to Congress about the proposals Step 3 – Appropriations Committees  after the budget is passed by Congress, appropriations committees must pass bills to authorize spending Step 4 – In the White House  the president can either sign the budget into law or veto it and wait for Congress to rewrite the budget or override the veto

Reminder! Remember, according to the Business Cycle, our economy goes through periods of expansion and contraction. During times of expansion, when the economy is growing, the government seeks to slow the economy. (This helps prevent inflation and huge crashes – remember the roller coaster analogy! No one wants to drop TOO fast!) During periods of contraction, when the economy is slowing, the government seeks to grow the economy.

Monetary Policy Tools Slow If the economy is growing too fast, the Fed can: Raise the discount rate (the rate the Fed charges member banks to borrow $) Raise the reserve rate (the amount of $ member banks must keep in the Fed as reserve against deposits) Sell gov’t bonds which removes cash from the hands of consumers = less spending Grow If the economy is not growing enough, the Fed can: Lower the discount rate ($ is cheaper for banks to borrow & they can lend more at lower interest rates = more spending) Lower the reserve rate (banks have more cash on-hand & they can lend more = more spending) Buy gov’t bonds which puts cash in the hands of consumers = more spending

Fiscal Policy Tools Slow If the economy is growing too fast, the gov’t can: Raise taxes to pull cash out of the market, slow business growth, and lower consumer spending Spend less money on gov’t projects to pull cash out of the market and slow growth Grow If the economy is not growing enough, the gov’t can: Lower taxes to put cash in the market, encourage business growth and hiring, and raise consumer spending Spend more money on gov’t projects to put people back to work, stimulate investment, and put money back into the market

What should the Fed do here?

What should the government do here?

What should the Fed do here?

What should the government do here?

The New Age of Wal-Mart Questions Describe five qualities the Wal-Mart scouting team look for when planning a new Wal-Mart store. Why are these important when planning a business? Describe one argument FOR the new Wal-Mart in Ellenville, NY. Describe one argument AGAINST the new Wal-Mart in Ellenville, NY. Which argument do you think is more convincing? Why? What did Wal-mart do in order to revamp its image in 2004? Describe the labor dispute (between Wal-mart and its employees) and the role of unions in the battle for worker rights. What are workers demanding? What is the company’s response? What is the role of government in the dispute?