BEllwork 1. Which of the following is NOT a condition for perfect competition? (1) many buyers and sellers participate (2) identical products are offered (3) market barriers are in place (4) buyers and sellers are well-informed about goods and services 2. How does a perfect market influence output? (1) Each firm adjusts its output so that it just covers all of its costs. (2) Each firm makes its output as large as possible even though some goods are not sold. (3) Different firms make different amounts of goods, but some make a profit and others do not. (4) Different firms each strive to make more goods to capture more of the market.

7.2 and 7.3 Market Structures E.Q: Describe the characteristics and give examples of each market structure

Market Structures Type of market structure influences how a firm behaves: Pricing Supply Barriers to Entry Efficiency Competition E.Q: Describe the characteristics and give examples of each market structure

Markets are classified by 4 structures 1. Pure (perfect) Competition 2. Monopolistic Competition 3. Oligopoly 4. Monopoly SWS 2006

Comparison of Market Structures Markets can be grouped into four basic structures: perfect competition, monopolistic competition, oligopoly, and monopoly Comparison of Market Structures Number of firms Variety of goods Control over prices Barriers to entry and exit Examples Perfect Competition Many None Wheat, shares of stock Monopolistic Competition Many Some Little Low Jeans, books Oligopoly Two to four dominate Some High Cars, movie studios Monopoly One None Complete Public water E.Q: Describe the characteristics and give examples of each market structure

Market Structure Determinants of market structure Freedom of entry and exit Nature of the product – homogenous (identical), differentiated? Control over supply/output Control over price Barriers to entry E.Q: Describe the characteristics and give examples of each market structure

The 5 conditions of perfect competition LARGE number of SMALL firms. No single buyer or seller can influence the price. Buyers and sellers deal in identical products. No product differences. (EXAMPLES: Salt, Flour, Commodity, Corn) Unlimited Competition: so many firms, that suppliers lose the ability to set their own price. No Barriers to Entry. Sellers are free to enter the market, conduct business and free to leave the market. (Low cost to enter) Each firm is a PRICE-TAKER (more on this later) CONSUMERS HAVE THE LARGEST SELECTION OF BUYERS TO BUY GOODS FROM BECAUSE NO SINGLE GOOD IS MORE APPEALING THAN ANOTHER. SWS 2006 E.Q: Describe the characteristics and give examples of each market structure

Financial markets – stock exchange, currency markets, bond markets Market Structure Examples of perfect competition: Financial markets – stock exchange, currency markets, bond markets Agriculture E.Q: Describe the characteristics and give examples of each market structure

Monopolistic Competition The 5 conditions of Monopolistic Competition LARGE number of large companies (but fewer than perfect competition). Sellers can influence the price through creating a product identity (more on this later) Products are NOT exactly identical, BUT VERY SIMILAR, so companies use PRODUCT DIFFERENTIATION Heavy Competition: Firms must remain aware of their competitor’s actions, but they each have some ability to control their own prices. Low Barriers to Entry: harder to get started because of the amount of competition. Monopolistic competition takes its name and its structure from elements of monopoly and perfect competition. E.Q: Describe the characteristics and give examples of each market structure

Imperfect or Monopolistic Competition **Market Structure** Imperfect or Monopolistic Competition Many buyers and sellers Products differentiated Relatively free entry and exit Each firm may have a tiny ‘monopoly’ because of the differentiation of their product Firm has some control over price Examples – restaurants, jeans, shampoos, shoes professions –plasterers, plumbers, etc. E.Q: Describe the characteristics and give examples of each market structure

Conditions of an Oligopoly What is an Oligopoly? A market in which a two-three large sellers control most of the production of a good or service and they work together on setting prices. Conditions of an Oligopoly Very few Sellers that control the entire market. Products may be differentiated or identical (but they are usually standardized) Medium barriers to entry: Difficult to Enter the market because the competitors work together to control all the resources & prices. The actions of one affects all the producers. Potential for Collusion E.Q: Describe the characteristics and give examples of each market structure

Oligopoly – Competition amongst the few **Market Structure** Oligopoly – Competition amongst the few Industry dominated by small number of large firms Many firms may make up the industry Medium to High barriers to entry Products could be highly differentiated – branding or homogenous Non–price competition Potential for collusion? Abnormal profits High degree of interdependence between firms E.Q: Describe the characteristics and give examples of each market structure

Market Structure Examples of oligopolistic structures: Supermarkets Banking industry Chemicals Oil Medicinal drugs Automotive E.Q: Describe the characteristics and give examples of each market structure

**Oligopoly** Oligopoly describes a market dominated by a few large, profitable firms. Collusion Collusion is an agreement among members of an oligopoly to set prices and production levels. Price- fixing is an agreement among firms to sell at the same or similar prices. Cartels A cartel is an association by producers established to coordinate prices and production. E.Q: Describe the characteristics and give examples of each market structure

**Market Structure** Monopoly: Pure monopoly – industry is the firm! Actual monopoly – where firm has >25% market share Natural Monopoly – high fixed costs – gas, electricity, water, telecommunications, rail E.Q: Describe the characteristics and give examples of each market structure

**Government Monopolies** A government monopoly is a monopoly created by the government. Technological Monopolies The government grants patents, licenses that give the inventor of a new product the exclusive right to sell it for a certain period of time. Franchises and Licenses A franchise is a contract that gives a single firm the right to sell its goods within an exclusive market. A license is a government-issued right to operate a business. Industrial Organizations In rare cases, such as sports leagues, the government allows companies in an industry to restrict the number of firms in the market. E.Q: Describe the characteristics and give examples of each market structure

Advantages and disadvantages of monopoly: Advantages: **Market Structure** Advantages and disadvantages of monopoly: Advantages: May be appropriate if natural monopoly Encourages innovation Development of some products not likely without some guarantee of monopoly in production Economies of scale can be gained – consumer may benefit E.Q: Describe the characteristics and give examples of each market structure

Monopoly: **Market Structure** High barriers to entry Firm controls price OR output/supply Abnormal profits in long run Possibility of price discrimination Consumer choice limited Prices in excess of MC Disadvantages: Exploitation of consumer – higher prices Potential for supply to be limited - less choice Potential for inefficiency – E.Q: Describe the characteristics and give examples of each market structure

**Output Decisions** Even a monopolist faces a limited choice – it can choose to set either output or price, but not both. Monopolists will try to maximize profits; therefore, compared with a perfectly competitive market, the monopolist produces fewer goods at a higher price. A monopolist sets output at a point where marginal revenue is equal to marginal cost. Setting a Price in a Monopoly Market Price $11 $3 Price 9,000 Output (in doses) Marginal Cost Demand Marginal Revenue B C A E.Q: Describe the characteristics and give examples of each market structure

Discussion Oligopolistic firms often work together to form a monopoly, by agreeing to set prices and production levels…the government try to regulate against this…why?

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