Market Structures

Laissez-Faire Philosophy that government should not interfere with business activity When the market was comprised of small businesses and small factories this was the dominating philosophy

4 Competition Structures

Perfect Competition Large number of buyers and sellers Buyers and sellers deal in identical products Each buyer and seller acts independently Buyers and sellers are well informed Buyers and sellers are free to enter, conduct, and shut down business

When there is Imperfect Competition this results in Less Competition Higher Prices Fewer Products Offered

Monopolistic Competition Products are similar, but not identical Sellers have ability to raise the price within a narrow range If sellers raise price too much, buyers will ignore minor differences and change brands

Oligopoly Few sellers dominate an industry When one firm lowers its price or introduces a new product, other firms follow Collusion can happen Price-Fixing

Monopoly Only one seller for a particular product Natural Monopoly Public Utilities Geographic Monopoly Technological Monopoly Government Monopoly

Market Failures 5 Main Causes of Market Failures Inadequate Competition Inadequate Information Resource Immobility Public Goods Externalities

Dealing with Externalities Correcting negative Externalities Government adds tax onto products Firms have less incentive because tax increases product’s price Higher prices reduce quantity demanded People affected may face fewer problems

Role of the Government

Maintain Competition Prohibiting Market Structures that are not competitive Regulating markets where full competition is not possible Laws have been passed to restrict monopolies and trusts Sherman Antitrust Act (1890) Clayton Antitrust Act (1914)

Maintain Competition Federal Trade Commission Act Authority to issue a cease and desist order Natural monopolies are not necessarily bad and are left alone Many monopolies are regulated by government agencies

Improve Economic Efficiency Efficient and competitive markets need adequate and transparent information Public Disclosure is a key part of economic efficiency Truth-in-Advertising laws Consumer lending laws Securities and Exchange Commission Government documents, studies and reports

Improve Economic Efficiency Government Provides public goods because a free economy does not promote them Public goods, like decent roads and highways, make the economy more productive Firms need an educated workforce

Modified Free Enterprise US Economy has evolved over time Government has a responsibility to protect the rights of workers and protect consumers from false claims, harmful products and price gouging Government concerns are focused on promoting economic efficiency by supplying public goods and promoting transparency