The Development of the Industrial United States Lesson 10. Rising Living Standards in the New Nation Lesson 25. The Economic Effects of the 19 th Century Monopoly

Why Did the Economy Grow after the Revolution? From the end of the American Revolution to the beginning of the Civil War, the population of the United States grew from approximately 4 million people to 32 million. It is not surprising that, with more people able to work at making more things, the economy would grow. The puzzling thing is that the output of goods grew faster during this time than the population did. The standard of living of the average American in 1860 was double what it had been at the end of the Revolution. How can an economy grow faster than the population of the society in which it develops?

Visual 10.1 Things Changed for Americans after the Revolutionary War Between 1789 and the 1830s... the number of wooden chairs per household almost doubled. most of the upper-middle class had upholstered sofas and chairs. most people in cities and villages had replaced open fireplaces with cook stoves and parlor stoves. many houses had larger windows because window glass was cheaper. farm families owned more candlesticks, and oil lamps were becoming common in cities and villages. one household in four or five owned a carpet, and houses in most cities and villages had window curtains. most households owned at least one clock. Source: Jack Larkin, The Reshaping of Everyday Life, 1790 – 1840 (New York: Harper & Row, 1989), pp. 139 – 143.

Visual 10.2 Productivity and Productive Resources Productivity is the amount of a good or service that can be produced with a given amount of productive resources over a certain period of time. Productive resources include natural, capital and human resources. Productive resources are scarce. Productivity increases when: 1. more goods or services are produced with the same amount of productive resources. 2. the same amount of goods or services is produced with fewer productive resources.

The Chalk-Mark Factory RoundWage $5.00 Number of Marks Produced Average Cost Per Mark 1 2 3

How Do Market Systems Solve the Scarcity Problem? Market systems provide incentives to increase productivity. The reward of profit provides businesses with incentives to increase productivity and lower per unit costs. Better Technology and Production Methods…

The Development of the Industrial United States Lesson 25 The Economic Effects of the 19 th Century Monopoly

Visual 25.1 Some Nineteenth-Century Trusts American Sugar Refining Trust American Tobacco Copper Trust Standard Oil Trust Steel Beam Trust United States Steel Corporation

Where Did the Monopolies Go? The late nineteenth century was a time when business leaders used a variety of tactics in their efforts to establish monopolies in many key industries. The railroads were prominent among these concentrated industries. Fear of business collusion caused the federal government to enact laws to stop businesses from colluding. Yet, relatively few businesses were ever broken up by actions of the government. What happened to all the others?

Different types of business firms Goal is maximizing profitsPrice determinationProfit levels Pure competitorYes The interactions of buyers and sellers in a large market determine the equilibrium price. Zero profits above the competitive return on capital. The pure competitor accepts the market price because competition is so steep and products produced by each firm are identical. MonopolistYes The monopolist determines the price given the demand for the product. The product is unique and there are no competitors. Positive profits. The monopolist dictates price due to being the only supplier of the item in demand. Prices tend to increase because there are no competitive forces at work. Visual 25.1 Business Entities

Different types of business firms Goal is maximizing profits Price determinationProfit levels CartelYes Groups of firms produce similar items. Together, they have monopoly power and there are no close substitutes for the cartels products. Positive profits, dependent on the membership upholding the agreement to raise prices and restrict output as in a monopoly. Cartels are illegal in the U.S. Visual 25.1 Business Entities

Visual 25.4 How Easily Can Cartels or Trusts Collude and Raise Prices? How Easily Can Cartels or Trusts Collude and Raise Prices? Members of the Railroad Cartel, make the following assumptions: All members of the railroad cartel provide identical services. There are no costs of production. The railroad customer can use all or one of the railroad services without incurring extra costs. The Cartel Agreement: Members of the railroad cartel can agree to choose one of the four pricing schemes on the next slide. Each member is to write the cartel price on the paper provided. The number written on the paper can be changed at any point prior to the time the transaction between the customer and railroad occurs.

Government vs Competition Sherman Anti-Trust Act of 1890 Clayton Act of 1914 Competitive forces where businesses compete for the consumers dollars to maximize profits…

Visual 25.4 How Easily Can Cartels or Trusts Collude and Raise Prices? Actual Price Per Unit ShippedTotal Revenue (P x Q) $4-$4-$4 All firms make $13 revenue (= $4 x 3.33 items shipped + $4 x x 3.33) $3-$3-$3 All firms make $10 in revenue (= $3 x 3.33 items shipped + $3 x x 3.33) $3-$3-$4 Firms pricing at $3 per unit make $15, otherwise $0 revenue (= $3 x 5 items shipped + $3 x x 0) $3-$4-$4 The one firm pricing at $3 makes $30, otherwise $0 profit (= $3 x 10 items shipped + $4 x x 0) Adapted from: Tawni Ferrarini and Robert Quinn, The Oligopoly Game, The Michigan Social Studies Journal (Spring, 2005), pp

Visual 25.5 How Competitive Were the Railroads of the 1870s? Some railroad engaged in anti-competitive practices such as price fixing. However, it remained difficult to suppress competition even in the railroad industry. Railroads added tens of thousands of miles of track in the 1870s and 1880s. Additional track provided opportunities for increased competition. Short hauls in rural areas faced little direct competition. However, long hauls between cities usually had two or more railroads in competition. Efforts by railroads to form agreements to fix their rates and find other means to reduce competition almost always failed. Aggressive managers or owners such as Jay Gould, would break with the agreements and begin price cutting. Price cutting took a variety of forms such as price discrimination and rebates. The effect to drive down rates, however, was the same.

Competition Matters When businesses compete for consumers dollars, they Find ways to increase productivity to lower per unit costs of production and, thus, lower consumer prices Search for new products and identify unique market niches Broaden services and increase variety Consumers benefit!