Economics Chapter 7

Chapter 7 Section 1

Objectives What is perfect (pure) competition? What is monopolistic competition? How do sellers differentiate their products under monopolistic competition?

Highly Competitive Markets What is a highly competitive market? Market that has a wide range of products with lower prices. Products are offered by a lot of sellers. Example-market for jeans.

Types of Highly Competitive Markets Two types of highly competitive markets: Perfect competition-Ideal market structure in which consumers and producers compete under the laws of supply and demand. Four characteristics of perfect competition: Many buyers and sellers act independently. Sellers offer identical products. Buyers are well informed about products. Sellers can enter or exit the market easily.

Types of Highly Competitive Markets 2. Monopolistic Competition-Seller offers different rather than identical products. ﭺThree characteristics of monopolistic competition: Product differentiation-point to differences. Nonprice Competition-Compare products in ways other than price. Concentrate on advertising brand name. Profit-by concentrating on product differentiation and nonprice competition, sellers can set prices above competitive rates to increase profits.

Chapter 7 Section 2 and 3

Objectives How is an oligopoly structured? What is a monopoly? What type of monopolies exist? What factors affect price in oligopolies and monopolies?

Imperfectly Competitive Markets We talked about perfectly competitive markets last time, but not all markets are this way. Therefore, we have imperfectly competitive markets or not competitive. There are two types of imperfectly competitive markets: Oligopoly Monopoly

Oligopoly Oligopoly-Market in which a few large sellers control the market. Three characteristics: Few large sellers Identical or similar products. Sellers cannot enter the market easily due to start-up costs and consumer loyalty.

Oligopoly Four ways oligopolies determine prices: Nonprice competition-advertising and brand loyalty. Interdependent pricing-the setting of prices in a manner responsive to one’s competitors. Can lead to a price war. Collusion-when sellers secretly agree to set production levels-illegal in the U.S. Cartel-same as collusion, but not secret.

Monopoly Monopolies-Market in which one seller controls the market. Three characteristics of a monopoly: Single seller No close substitute available. Other sellers cannot enter the market easily.

Monopoly Four types of Monopolies: Natural monopoly-market in which competition is inconvenient and impractical. SCE&G, no sense in having two power companies in Williston. Geographic monopoly-market in which there are no other producers or substitutes within a region. Technological monopoly-market that is dominated by a single producer because of new technology. Government gives patents to protect producer. Government monopoly-any market in which the government is the sole producer. Town water.

Monopoly Three reasons that prevent monopolies from raising prices to high: Consumer demand Potential competition-high profits leads others to enter the market. Government regulation.

Chapter 7 Section 4

Objectives Explain how government acts to prevent monopolies. Analyze the effects of anti-competitive business practices. Describe how government acts to protect consumers. Discuss why some industries have been deregulated and the results of that deregulation.

Promoting Competition Government regulation: rules or laws that control business behavior. promotes competition and protects consumers Antitrust legislation: define monopolies, allow government to control or break them up. Protects from: Trust: group of firms combined to reduce competition Merger: joining of firms or purchase of one firm by another

Promoting Competition Origins of Antitrust Legislation Late 1800s, trusts dominated oil, steel, railroad industries 1890 Sherman Antitrust Act enabled government to control monopolies regulate practices that might reduce competition Standard Oil Company had 90 percent of industry; set output, prices forced to give up control of 33 companies

Promoting Competition Antitrust Legislation Today: Federal Trade Commission, Justice Department enforce antitrust legislation tend to support mergers that benefit consumers tend to block mergers that concentrate market in hands of few firms To evaluate potential merger, look at how market is defined market share before and after merger; if competitors get eliminated

Ensuring a Level Playing Field Government ensures business practices do not reduce competition with less competition, prices go up, supply goes down Prohibits Unfair Business Practices Price fixing: competing businesses collaborate to set prices Market allocation: businesses divide up market, control own territory Predatory pricing: set prices below cost to drive out small producers

Protecting Consumers Consumer Protection Agencies Government protects consumers by regulating different aspects of business Federal Trade Commission promotes competition, prevents unfair practices Other agencies regulate specific industries, protect consumers (EPA, FCC, etc. )

Deregulating Industries Deregulation—reduces or removes government oversight and control Deregulation may lead to fewer consumer protections Usually results in lower prices since markets become more competitive with regulated prices, firms have no incentive to reduce costs