6/8/20141 Market Structures Chapter 7 Section 1 – Competition & Market Structures In this section, you will learn that market structures include perfect competition, monopolistic competition, oligopoly, and monopoly

6/8/20142 Laissez-Faire Philosophy that government should not interfere with business activities Limit government role to the following: Protecting property Enforcing contracts Settling disputes Protecting firms against foreign competition

6/8/20143 Market structure Nature & degree of competition among firms in the same industry Four types: 1.Perfect competition 2.Monopolistic competition 3.Oligopoly 4.Monopoly

6/8/20144 Perfect competition Market structure with many well-informed & independent buyers & sellers who exchange identical products Speculating: What would happen if consumers did not have easy access to information about products & services? Necessary conditions: 1.Buyers & sellers are reasonably well-informed about products & prices 2.Buyers & sellers are free to enter into, conduct, or get out of business 3.Price-Takers Competition/Inelastic Demand

6/8/20145 Imperfect competition Market structure that does not meet all conditions of perfect competition Most firms in the U.S. today fall into one of the other three market structures

6/8/20146 Monopolistic competition Identifying Central Issues - Name your favorite brand of soft drink or candy. Explain why it is your favorite. Market structure that meets all conditions of perfect competition except identical products Product differentiation Real or imagined differences between competing products in the same industry

6/8/20147 Nonprice Competition Sales strategy focusing on a products appearance, quality, or design rather than its price They do this to make their products stand out.

6/8/20148 Profit Maximization Profit maximizing behavior of the monopolistic competitor is no different from that of other firms It is easy for firms to enter the monopolistically competitive industry

6/8/20149 Oligopoly A few large sellers dominate the industry Products have distinct features Interdependent behavior Cause & Effect- What is the effect of a company in an oligopoly making a product change? Nonprice competition Collusion Price fixing es es

6/8/ Monopoly Market structure with only one seller of a particular product Very few industries are able to do this legally i.e. telephone companies, local cable t.v. providers come pretty close 58&unit=Monopoly 58&unit=Monopoly

6/8/ Types of monopolies Natural Average costs are minimized by having a single firm produce the product Geographic Ex. One gas station in town Technological I.e. Patents issued by government Government Ex. City water supply

6/8/ Economies of scale Situation in which the average cost of production falls as a firm gets larger Analyzing- Why do natural monopolies sometimes result in economies of scale?

6/8/ Market Failures Section 2 In this section, you will find out that inadequate competition, inadequate information, immobile resources, public goods, and externalities can lead to market failures

6/8/ Types of market failures Occurs whenever one of the conditions necessary for competitive markets does not exist Causes: 1.Inadequate competition 2.Inadequate information 3.Resource immobility 4.Public goods – goods or services whose benefits are available to everyone t=Public Goods and Responsibilities t=Public Goods and Responsibilities 5.Externalities t=Pollution and the Environment t=Pollution and the Environment

6/8/ Types of externalities Economic side effect that affects an uninvolved 3 rd party Positive Beneficial side effect that affects an uninvolved 3 rd party Negative Harmful side effect that affects an uninvolved 3 rd party

6/8/ Dealing with externalities Correcting negative externalities I.E. government requiring a polluting company to clean up their act Encouraging positive externalities I.E. subsidizing public education

6/8/ The Role of Government Section 3

6/8/ Maintain competition Antitrust legislation Trusts – illegal combinations of corporations or companies organized to hinder competition Price discrimination – practice of selling the same product at different prices to different buyers Cease and desist order – ruling requiring a company to stop an unfair business practice that reduces or limits competition

6/8/ Government regulation Believe it or not, not all monopolies are bad. Firms take advantage of low production costs Government regulates its activities and ensures that the business does not take advantage of the consumer

6/8/ Public disclosure Requirement that a business reveal information about its products or its operations to the public