© 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. chapter 5 1 Market Structures Perfect Competition and Monopoly 5-1 Monopolistic Competition and Oligopoly 5-2

© 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. chapter 5 2 L earning O bjectives 5-1 Perfect Competition and Monopoly Explain the characteristics of perfectly competitive markets. LO1-1 Describe the characteristics of a monopoly. LO1-2

© 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. chapter 5 3 Vocabulary Characteristics of Perfect Competition market structure perfect competition barrier to entry price taker Monopoly monopoly natural monopoly price maker 5-1 Perfect Competition and Monopoly

© 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. chapter 5 4 Characteristics of Perfect Competition A market structure describes the key characteristics of a market, which include the number of firms and the similarity of the products they sell. This description includes how easy or difficult it is for new firms to enter the market. 5-1 Perfect Competition and Monopoly

© 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. chapter 5 5 Characteristics of Perfect Competition Perfect competition is a market structure in which a large number of small firms sell identical products, and entry into the market is easy. 5-1 Perfect Competition and Monopoly A barrier to entry is an obstacle that makes it difficult for a new firm to enter a market. ► finances ► technology ► government

© 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. chapter 5 6 Characteristics of Perfect Competition A price taker is a seller that has no control over the price of the product it sells. The firm’s price of its product is determined by market supply and demand conditions. It impossible for the perfectly competitive firm to have the market power to affect the market price. The perfectly competitive firm will not set the price above the prevailing market price and risk selling zero output. A firm will not set the price below the market price because a lower price would reduce the firm’s total revenue. 5-1 Perfect Competition and Monopoly

© 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. chapter 5 7 Vocabulary CHECKPOINT Characteristics of Perfect Competition 5-1 Perfect Competition and Monopoly market structure perfect competition barrier to entry price taker Do all sellers in perfect competition have to sell their products at the equilibrium price? Compare a farmer selling wheat and a shop selling skateboards. The wheat seller operates in perfect competition and can only sell wheat at the equilibrium price. At one penny higher, the farmer cannot sell any wheat. The seller of skateboards can sell at different prices. At a higher price, fewer boards will be sold. This law does not apply to the special case of perfect competition.

© 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. chapter 5 8 Monopoly Monopoly is a market structure in which a single seller sells a unique product. A monopoly has the market power to set its price and not worry about competitors. Under monopoly, the consumer has a simple choice— either buy the monopolist’s product by paying the asked price or do without the product. 5-1 Perfect Competition and Monopoly

© 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. chapter 5 9 Monopoly A natural monopoly is a market in which the average cost of production is lowest when only one firm supplies a good or service. A single firm can supply the entire market demand at a lower cost than two or more smaller firms. Public utilities, such as the natural gas, water, and cable televisions, are examples of natural monopolies. The government grants these industries an exclusive franchise in a geographic area. 5-1 Perfect Competition and Monopoly

© 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. chapter 5 10 Monopoly A price maker is a seller that does not consider competition when setting its price. The monopoly firm is a price maker that can choose any price along its market demand curve. The monopolist considers its costs and total revenue and chooses the price that generates the greatest profit. 5-1 Perfect Competition and Monopoly

© 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. chapter 5 11 Vocabulary CHECKPOINT Monopoly 5-1 Perfect Competition and Monopoly monopoly natural monopoly price maker How does the government create monopolies? Are all monopolies created by the government? The government can set a barrier to entry that legally prohibits competition. Cable television, water, and electricity are examples. Patents and copyrights are also examples. In contrast, there are monopolies for other reasons. A firm may have exclusive ownership of a resource or a firm enjoys a natural monopoly. In these cases, no law legally prohibits competition.

© 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. chapter 5 12 L earning O bjectives 5-2 Monopolistic Competition and Oligopoly Explain the characteristics of monopolistic competition markets. LO 2-1 Describe the characteristics of oligopoly markets. LO 2-2

© 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. chapter 5 13 Vocabulary 5-2 Monopolistic Competition and Oligopoly Monopolistic Competition monopolistic competition product differentiation Oligopoly—Competition among the Few oligopoly cartel

© 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. chapter 5 14 Monopolistic Competition A monopolistic competition as a market structure characterized by many small sellers, a differentiated product, and easy market entry. 5-2 Monopolistic Competition and Oligopoly The key feature of monopolistic competition is product differentiation— the process of creating differences between similar goods and services.

© 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. chapter 5 15 Vocabulary CHECKPOINT Monopolistic Competition monopolistic competition product differentiation As a consumer, from which market would you prefer to buy a product: perfect competition, monopoly, or monopolistic competition? Why? Perfect competition gives you the free market outcome of the lowest prices. This is because sellers in this market are price takers. In monopoly or monopolistic competitive markets, you will pay more. This is because firms in these markets are price makers. They have a degree of control over charging higher prices. 5-2 Monopolistic Competition and Oligopoly

© 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. chapter 5 16 Oligopoly—Competition among the Few An oligopoly is a market structure characterized by a few large sellers, either of an identical or differentiated product, and difficult market entry. A cartel is a group of firms that formally agree to reduce competition by coordinating the price and the output of a product. 5-2 Monopolistic Competition and Oligopoly

© 2013 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. chapter 5 17 Vocabulary CHECKPOINT Oligopoly—Competition Among the Few oligopoly cartel In the cereal aisle, there are many brands of the same product. Each brand is slightly different from the others. Is the breakfast cereal market structure monopolistic competition or oligopoly? The different cereals listed in this example are produced by only four companies: General Mills, Kellogg's, Quaker Oats, and Post. In fact, there are relatively few firms in the cereal market. So even though they sell a differentiated product, the market structure cannot be monopolistic competition. If you said the cereal industry is an oligopoly, you are correct. 5-2 Monopolistic Competition and Oligopoly