Warm Up It was August, and Jen just shopped for back-to-school clothes. She went to many stores and bought different styles of clothes at different prices. Because Jen had a new job, she also went to the only uniform store in town to buy a uniform. The uniform cost much more than many of the other items she bought. When Jen got home and thought about the experience, two questions ran through her mind. Why do you think the uniform so much more expensive than the other clothes? What do you think makes one market very competitive and another market less so?

Components of Markets Number of participants/sellers/providers Variety of goods (how similar or different are the products/services being sold by each participant?) Barriers to entry Control over price

Pure Competition Pure Competition: a large number of firms all produce the same product and no single seller controls supply or prices All firms sell the same product for the same price The market is always in a state of equilibrium The market provides the buyer with full information about the features of the product and its price

A purely competitive market has many suppliers selling identical products called commodities. Why isn’t the market for automobiles a purely competitive market?

Flea markets have one characteristic of pure competition—ease of entry Flea markets have one characteristic of pure competition—ease of entry. Almost anyone can secure a space in a flea market to sell his or her goods.

Commodities such as corn can be sold in a purely competitive market Commodities such as corn can be sold in a purely competitive market. Corn, like other commodities, is considered the same no matter who sells it.

Farmer’s markets usually have easy market entry and exit Farmer’s markets usually have easy market entry and exit. New vendors can easily set up tables to sell their goods and then leave them whenever they choose.

Barriers to Entry and Competition High Start-Up Costs: The expenses that a new business must pay before it can begin to produce and sell goods are high Complex Technology Need for specialized skills

Fields such as computer technology, which require many skills or years of education, usually have high barriers to entry and, for that reason, are usually not purely competitive.

In pure competition, suppliers must match the lowest supplier’s price or exit the market. Why are consumers unwilling to pay one supplier’s higher price in such a market?

Under pure competition, supply and demand set the equilibrium price and equilibrium quantity. Would the entry of a new firm change the equilibrium price? Why or why not?

Monopolistic Competition Has the same conditions as pure competition except for products being identical Products are very similar but have unique differences such as the brand name, colors, and quality of the product The word monopolistic the seller’s efforts to convince consumers that its product is unique enough to be worthy of a higher price.

The market for jeans is monopolistically competitive because jeans can vary by size, color, style, and designer.

Monopolistic Competition Large number of firms Characterized by product differentiation and non-price competition Mainly done through advertising Limited control over prices Easy to enter and exit the market

Under conditions of monopolistic competition, prices of similar products are not identical but are usually close to one another.

Non-price Competition Physical characteristics Location Service level (example: fast food vs. sit-down restaurants) Advertising, image, or status Brand name vs. luxury products

How are pure competition and monopolistic competition similar How are pure competition and monopolistic competition similar? How are they different?

Case Study: Fast Food Pick a specific category of fast food restaurants (burgers, tacos, chicken, etc) and select at least 3 brands from that category Describe the similarities and differences between the products and services offered at each brand. (Think about things such as the methods food is cooked, the pricing categories on the menu, characteristics of the food)

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