Competition and Market Structures

Jump Start Chapter 7 section 1 Perfect competition is characterized by all of the following EXCEPT: A smaller number of buyers and sellers Well informed buyers and sellers Identical products Independent buyers and sellers A monopoly based on the absence of other sellers in a certain location is called An oligopoly A natural monopoly A geographic monopoly Economies of scale Monopolistic competition is separated from pure competition by: Collusion Profit maximization Product differentiation Imperfect competition Oligopoly is a market structure with a great deal of Competition among firms Interdependence among firms Independence among firms Profits among firms A monopoly’s prices are determined by: competing firms market equilibrium perfect competition the monopoly

Perfect Competition

Market Structure Characterized by the degree of competition among business in the same industry Types of Competition: Pure Competition Monopolistic Competition Oligopoly Monopoly

Perfect (Pure) Competition When a large number of buyers and sellers exchange identical products under five conditions There should be a large number of buyers and sellers The products should be identical Buyers and sellers should act independently Buyers and sellers should be well-informed Buyers and sellers should be free to enter, conduct, or get out of business

Perfect Competition Under a Perfect Competition Imperfect Competition Supply and demand set the equilibrium price Each firms sets a level of output that will maximize its profits at that price Imperfect Competition Refers to market structures that lack one or more of the five conditions

Monopolistic Competition Meets all conditions of perfect competition except for identical products Use product differentiation Real or imagined differences between competing products in the same industry Use non-price competition Advertising, giveaways, promotional campaigns Sell within a narrow price range to try to raise the price = profit maximization

Oligopoly A few large businesses dominate an industry When one business makes a move, the others usually follow Ex: a price war…cuts in airline ticket Sometimes results in collusion or price-fixing which is illegal Collusion: formal agreement to set prices Price-Fixing: charge the same

Monopoly One seller of a product that has no close substitutes Natural Monopoly Geographic Monopoly Technological Monopoly Government Monopoly

Natural Monopoly More efficient for only one business to produce the goods Ex: Marta, Water co. Government gives permission

Geographic Monopoly No other business chooses to compete in that area Ex: small town drugstore

Technological Monopoly Results from new discoveries and inventions. The government grants these monopolies through the issue of patents and copyrights Patents: inventions Copyrights: publish

Government Monopoly Involves products people need that private industry might not adequately provide

Vocabulary Perfect competition Non-price competition Oligopoly Collusion Economies of scale Market structure in which a few very large sellers dominate the industry Market situation in which a large number of well-informed and independent buyers and sellers exchange identical products The use of advertising, giveaways, and other promotional campaigns to convince buyers one product is better than another A situation in which the average cost of production fails as the firm gets larger A formal agreement to set prices or to otherwise behave in a cooperative manner

Jump Start Chapter 7 section 1 Perfect competition is characterized by all of the following ECCEPT: A smaller number of buyers and sellers Well informed buyers and sellers Identical products Independent buyers and sellers A monopoly based on the absence of other sellers in a certain location is called An oligopoly A natural monopoly A geographic monopoly Economies of scale Monopolistic competition is separated from pure competition by: Collusion Profit maximization Product differentiation Imperfect competition Oligopoly is a market structure with a great deal of Competition among firms Interdependence among firms Independence among firms Profits among firms A monopoly’s prices are determined by: competing firms market equilibrium perfect competition the monopoly

Market Failures Section 2

Market Failures Four conditions needed Adequate competition must exist Buyers and sellers must be well-informed; opportunities in the market Resources must be free to move from one industry to another Prices must reasonably reflect the cost of production, including rewards Failure occurs when these are altered

Jump Start Chapter 7 section 2 all of the following may lead to a market failure EXCEPT resource mobility inadequate competition insufficient information prices do not reflect the cost of production Which of the following is NOT a public good? Community park Fire department Armed forces Movie theater What is the result of inadequate competition? The development of monopoly Artificial shortages and higher prices Excessive political influence by businesses All of the above Positive and Negative externalities are called market failures because They cause imperfect competition They lead to higher prices Their cost and benefits are not reflected in the market prices paid by buyers and sellers They provide public goods Which of the following is an example of resource mobility? An engineer asking for a higher wage An aircraft factory laying off engineers An engineer taking a job at a different factory An aircraft factory selling its products

Inadequate Competition Decrease b/c of mergers and acquisitions Inefficient resource allocation = no incentive to use resources carefully Reduced output = monopoly can retain high prices by limiting supply Large business can exert its economic power over politics

Inadequate Competition Failures on the Demand side are harder to correct than failures on the Supply side Supply side: No competition exists if a monopolist dominates Demand Side Buyers can be found but….how many want hydroelectric dams, space shuttles, etc…

Inadequate Information Consumers, businesspeople, and government official must have adequate information about market conditions Information Easy to find in want ads, sale prices in newspaper If difficult to find = market failure

Resource Immobility Occurs when land, capital, labor, and entrepreneurs stay with in a market Returns are slow Remain unemployed Resources will not or cannot move to a better market The existing market does not always function efficiently Large auto assembly plant, steel mill, or mines closes leaving hundreds unemployed Not all can find new jobs Not be able to sell homes When resources are immobile or refuse to move, markets do not always function effciently

Externalities Unintended side effects Negative Positive Harm, cost, or inconveniences suffered by a third party Positive Benefits received by someone who had nothing to do with the activity that created the benefit Market failures Market prices that buyers and sellers pay do not reflect the cost and/or benefits of the action Negative: noise from the expansion of the airport Positive: people across town benefit from additional jobs generated by the airport expansion Market failure: does the airline or the air traveler compensate the homeowner for the diminished value of thhe property?

Public Goods Products that everyone consumes Use by one individual does not diminish the satisfaction or value to others Uncrowded highways, flood control measures, national defense, police and fire protection Market is successful in satisfying individual wants and needs; fails to satisfy them on a collective basis Government usually has to supply them

Vocabulary Review Market failure Externality Negative externality Positive externality Public goods An unintended side effect that either benefits or harms an uninvolved third party An unwanted harm, cost, or inconvenience suffered by a third party because of actions by others Products that are collectively consumed by everyone A benefit received by third party that had nothing to do with the activity that generated the benefit Occurs when any one of the four conditions necessary for a competitive free enterprise economy is significantly altered

Jump Start Chapter 7 section 2 all of the following may lead to a market failure EXCEPT resource mobility inadequate competition insufficient information prices do not reflect the cost of production Which of the following is NOT a public good? Community park Fire department Armed forces Movie theater What is the result of inadequate competition? The development of monopoly Artificial shortages and higher prices Excessive political influence by businesses All of the above Positive and Negative externalities are called market failures because They cause imperfect competition They lead to higher prices Their cost and benefits are not reflected in the market prices paid by buyers and sellers They provide public goods Which of the following is an example of resource mobility? An engineer asking for a higher wage An aircraft factory laying off engineers An engineer taking a job at a different factory An aircraft factory selling its products

The Role of Government

Jump Start Chapter 7 section 3 Which of the following antitrust laws was enacted first? Federal Trade Commission Act Clayton Antitrust Act Sherman Antitrust Act Robinson-Patman Act The federal law that first outlawed price discrimination is the Public disclosures supports competition by Providing buyers and sellers with information Revealing competitive trade secrets Converting private businesses into government agencies Concentrating information in the hands of the government Which of the following is most likely be subject to government monopoly regulations? A computer software company A large oil company A local restaurant A local cable company The government takes part in the United States economy to Encourage competition and fair play Prevent monopolies and reduce cost of imperfect competition Regulate industries in which monopolies serve the public good All of the above

Antitrust Legislation Trust: legally formed combinations of corporations or companies Antitrust laws prevent or break up monopolies, preventing failures due to inadequate competition

Federal Trade Commission Competition in the market is protected by the government through antitrust legislation and the creation of the Federal Trade Commission. Federal Trade Commission: has the authority to stop any unfair business practices that reduce or limit competition

Antitrust Legislation 1890: Sherman Antitrust Act:1st law against monopolies 1914: Clayton Antitrust Act: outlawed price discrimination 1914: The Federal Trade Commission: empowered to issues cease and desist orders, requiring companies to stop unfair business practices 1936: Robinson-Patman Act: outlawed special discounts to some customers

Government Regulation Goal is to set the same level price and service that would exist if a monopolistic business existed under competition Use: tax system to regulate businesses with negative externalities Prevents market failures

Public Disclosure Requires businesses to reveal information about Products Services to Public: Banks, corporations, lending institutions Provides information to prevent market failures “Truth in Advertising” laws (false claims)

Indirect Disclosure Government support of the internet Availability of Gov’t documents Businesses post information

Modified Free Enterprise Government intervention to encourage competition, Prevent monopolies Regulate industry Fulfill the need for public goods

Modified Free Enterprise Today’s US Economy Mixed of different market structures Different business organization Varying degrees of government regulation

Vocabulary Review Trust Clayton Antitrust Act Price Discrimination Robinson-Patman Act 5. Cease and desist order Strengthened previous legislation regarding price discrimination Built on Sherman Antitrust Act by extending government powers against monopolies An FTC ruling requiring a company to stop an unfair business practice Legally formed combinations of corporations or companies Practice of charging customers different prices for the same product

Jump Start Chapter 7 section 3 Which of the following antitrust laws was enacted first? Federal Trade Commission Act Clayton Antitrust Act Sherman Antitrust Act Robinson-Patman Act The federal law that first outlawed price discrimination is the Public disclosures supports competition by Providing buyers and sellers with information Revealing competitive trade secrets Converting private businesses into government agencies Concentrating information in the hands of the government Which of the following is most likely be subject to government monopoly regulations? A computer software company A large oil company A local restaurant A local cable company The government takes part in the United States economy to Encourage competition and fair play Prevent monopolies and reduce cost of imperfect competition Regulate industries in which monopolies serve the public good All of the above