Economics Chapter 7: Market Structures

Economics Chapter 7: Market Structures 1. Perfect Competition is when a large number of buyers and sellers exchange identical products under 5 conditions.

Economics Chapter 7: Market Structures 5 Conditions Characterize Perfect Competition A large number of buyers and sellers Buyers and sellers deal in identical products No need to advertise No need for brand names Each buyer and seller acts independently Buyers and sellers are reasonably well-informed about products and prices Buyers and sellers are free to enter into, conduct, or get out of business.

Economics Chapter 7: Market Structures Under perfect competition, supply and demand set the equilibrium price, and each firm sets a level of output that will maximize its profits at that price.

Economics Chapter 7: Market Structures Imperfect Competition is the name given to a market structure that lacks one or more of the 5 conditions of perfect competition.

Economics Chapter 7: Market Structures 2. Monopolistic Competition is the market structure that has all the conditions of perfect competition except for identical products.

Economics Chapter 7: Market Structures 1st left hand page Question #1 What are some examples of how different jean companies differentiate their products?

Economics Chapter 7: Market Structures Monopolistic competitors use Product Differentiation – real or imagined differences between competing products in the same industry.

Economics Chapter 7: Market Structures Monopolistic competitors use Non-Price Competition – the use of advertising, giveaways, or other promotional campaigns to convince buyers that the product is somehow better than another brand – often takes the place of price competition.

Economics Chapter 7: Market Structures 1st left hand page Question #2 Name your favorite brands of the following items: Jeans, Shampoo, Perfume (Cologne for guys), Tennis Shoes, and Make-up (cars for guys). Explain why you like each of the brands over other products that are the same. Did advertisement of these products influence your choice? If so, how?

Economics Chapter 7: Market Structures Monopolistic Competitors usually advertise or promote heavily. This is why they are able to charge more for “designer” jeans.

Economics Chapter 7: Market Structures The Monopolistic Competitor can enter the market easily. If they can convince consumers their product is better, they can charge a higher price.

Economics Chapter 7: Market Structures 2nd left hand page Question #1 Find 2 advertisements in a newspaper or magazine of like items. Glue in notebook and List how the advertisements try to show their product is better than the other item.

Economics Chapter 7: Market Structures 3. Oligopoly is a market structure in which a few very large sellers dominate the industry.

Economics Chapter 7: Market Structures The product of an Oligopoly may be differentiated as in the auto industry or standardized as in the steel industry.

Economics Chapter 7: Market Structures Examples – Pepsi, Coke, McDonalds, Burger King, Jack-In-The-Box, and Wendy’s Because oligopolies are so large, whenever one firm acts, the other firms usually follow.

Economics Chapter 7: Market Structures Oligopolists may all agree formally to set prices, called collusion, which is illegal (because it restricts trade).

Economics Chapter 7: Market Structures 2 Forms of Collusion price fixing – agreeing to charge same or similar prices for a product (which is often above market price). Dividing up the market for guaranteed sales.

Economics Chapter 7: Market Structures Because Oligopolists tend to act together when it comes to changing prices, most firms tend to compete on a non-price basis by advertising or by enhancing their products with new or different features.

Economics Chapter 7: Market Structures 4. Monopoly – is a market structure with only one seller of a particular product.

Economics Chapter 7: Market Structures 4 Types of Monopolies Natural Monopoly is a market situation where the costs of production are minimized by having a single firm produce the product or provides a service because it minimizes the overall costs (public utilities).

Economics Chapter 7: Market Structures Geographic Monopoly occurs when the location cannot support two or more such businesses (small town drug store).

Economics Chapter 7: Market Structures Technological Monopoly occurs when a producer has the exclusive right through patents or copyrights to produce or sell a particular product (an artist’s work for his lifetime plus 50 years).

Economics Chapter 7: Market Structures Government Monopoly occurs when the government provides products or services that private industry cannot adequately provide (uranium processing).

Economics Chapter 7: Market Structures Market Failures occur when sizeable deviations from one or more of the conditions required for perfect competition take place.

Economics Chapter 7: Market Structures 5 Reason Markets Fail 1. Inadequate Competition Inefficient resource allocation – because no competition Higher prices and reduced output Economic and political power → ask for tax break and threaten to move if don’t get it. Not enough demand to have competition

Economics Chapter 7: Market Structures 2. Inadequate Information 3. Resource Immobility – this means that land, capital, labor, and entrepreneurs do not move to markets where returns are the highest. Instead they tend to stay put and sometimes remain unemployed.

Economics Chapter 7: Market Structures 4. Externalities – or unintended side effect that either benefits or harms a 3rd party not involved in the activity that caused it. (positive and negative externalities). Externalities are regarded as market failures because they are not reflected in the market prices of the activities that caused the side effects.

Economics Chapter 7: Market Structures 5. Public Goods – are products that are collectively consumed by everyone and whose use by one individual does not diminish the satisfaction or value available to others. (ex) national defense and public education. A market fails because it cannot withhold supply from those who refuse to pay.

Economics Chapter 7: Market Structures Role of The Government Anti-trust laws prevent or break up monopolies, preventing market failures due to inadequate competition.

Economics Chapter 7: Market Structures The Sherman Anti-Trust Act of 1890 was enacted to prohibit trusts, monopolies, and other arrangements that restrain competition. The Clayton Anti-Trust Act was passed in 1914 to outlaw price discrimination (the practice of charging customers different prices for the same product).

Economics Chapter 7: Market Structures The Federal Trade Commission (1914) was empowered to issue cease and desist orders, requiring companies to stop unfair business practices. The Robinson-Patman Act of 1936 was passed to strengthen the price discrimination provisions of the Clayton Anti-Trust Act.

Economics Chapter 7: Market Structures Government’s goal in regulating is to set the same level of price and service that would exist if a monopolistic business existed under competition.

Economics Chapter 7: Market Structures Public Disclosure is used as a tool to promote competition. Any corporation that sells its stocks publicly is required to supply financial reports to both its investors and to the SEC (Securities Exchange Commission).

Economics Chapter 7: Market Structures The purpose of public disclosure is to provide adequate information to prevent market failures.

Economics Chapter 7: Market Structures Corporations, banks, and other lending institutions must disclose certain information. There are also “truth-in-advertising” laws that prevent sellers from making false claims about their products.

Economics Chapter 7: Market Structures Modified Free Enterprise Government intervenes in the economy to encourage competition, prevent monopolies, regulate industry, and fulfill the need for public goods.

Economics Chapter 7: Market Structures Today’s U.S. economy is a mixture of different market structures, different kinds of business organizations, and varying degrees of government regulation.

Economics Chapter 7: Market Structures The End