CHAPTER 7 Market Structures

Key Concept  Economic Model  Examine degree of competition Why it Matters  Major impact  Competitive pricing

What is Perfect Competition? Characteristics  Economists classify markets based on how competitive the are  Market Structure-economic model of competition within an industry  Perfect Competition-ideal model of a market economy  Economists assess competitiveness of markets by were it falls short

Characteristics of Perfect Competition 1:Many Buyers and Sellers  No Single Power  Power of Choice  Numerous 2:Standardized Product  Standardized Product-one producers product is identical to another’s  Perfect Substitutes  Basic Commodities 3:Freedom  Entry and Exit  No Regulation 4:Independent Buyers and Sellers  No Influence on Price  Supply and Demand set Equilibrium  Independence ensure competitiveness 5:Informed Buyers and Sellers  Compare prices  Seller is knowledgeable  Price taker-seller that accepts market price set by supply and demand

Competition in the Real World Key Concepts  No perfectly competitive markets  Imperfect competition- market structures that lack one or more of the conditions  Some markets come close

The Characteristics of a Monopoly Monopoly-market structure with one seller, no substitutes for a product Cartel-organization of sellers that agree to set prices, limit output Price Maker-business without competitors, can set prices Barrier to Entry-obstacle to entering market ex: government regulations, size, resources, technology

3 Characteristics of Monopolies 1: Only One Seller  Controls supply  Da Beers Diamonds 20 th Century 2: A Restricted, Regulated Market  Government regulations create monopoly 3: Control of Prices  Control prices because no close substitutes

Types of Monopolies Natural Monopoly- cost of production lowest with only one producer Government Monopoly- government owns and runs or permits only one producer Technological Monopoly- one firm owns invention, technology, method Geographic Monopoly- no other sellers within a region

Types of Monopolies 1:Natural Monopoly  Inefficient competitors  Economies of Scale- average production costs falls as production grows  Govt. Supports and Regulates 1:Government Monopoly  Govt. runs some businesses  Postal Service 3:Technological Monopoly  Patent- legal registration of invention; gives inventor sole rights  Limited time 4:Geographic Monopoly  Sports Teams  Physical Isolation  Very small market

Profit Maximization by Monopolies Monopoly Cannot Set Prices too High  Faces downward-sloping demand curve  Raises equilibrium price by producing less than competitive market would Most Countries Have Laws to Prevent Monopolies

Vocabulary Market Structureeconomic model of competition within an industry Perfect Competition-ideal model of a market economy Standardized Productone producers product is identical to another’s Price Takerseller that accepts market price set by supply and demand Imperfect Competition market structures that lack one or more of the conditions Monopolymarket structure with one seller, no substitutes for a product Cartelorganization of sellers that agree to set prices, limit output

Vocabulary Price Makerbusiness without competitors, can set prices Barrier to entry obstacle to entering market ex: government regulations, size, resources, technology Natural Monopolycost of production lowest with only one producer Government Monopoly- government owns and runs or permits only one producer Technological Monopolyone firm owns invention, technology, method Geographic Monopolyno other sellers within a region Economies of Scaleaverage production costs falls as production grows Govt. Supports and Regulates Patent- legal registration of invention; gives inventor sole rights Limited time