The Last Word: Ch 9 Guided reading due Friday
Chapter 9
Section 1
Market structures are a way to categorize businesses by the amount of competition they face. Four basic market structures in the American economy are: perfect competition monopolistic competition oligopoly monopoly.
Many buyers and sellers Similar products Sellers in the market cannot prevent others from entering market, the initial investment costs are low, and the good/service is easy to learn to produce. Information about prices, quality, and sources is easy to get. Sellers or buyers cannot group together to control price. Supply and demand control the price.
The agriculture market is close to a perfectly competitive industry. No single farmer has control over price. Supply and demand determine price. Individual farmers have to accept market price. Demand for agriculture is unique; inelastic
Price will drop to a level that benefits both consumer and entrepreneur. Economic efficiency Resources are used in most productive manner.
Section 2
Most industries are a form of imperfect competition. There are three types of imperfect competition that differ in how much competition and control over price the seller has.
Most extreme form of imperfect competition A single seller controls the supply and price of product No substitutes: no competitor offers good or service that closely replaces what monopoly sells No entry: a competitor cannot enter the market due to government regulations, large initial investment, or ownership of raw materials
Almost complete control of market price Can raise prices with no fear of competition Natural monopolies are providers of utilities, bus services, cable, and have economies of scale, producing the largest amount for the lowest cost. Geographic monopolies are created due to geographic barriers for competition
Technological monopolies are the result of inventions that are patented and copyrighted. Government monopolies are similar to natural monopolies but held by the government. Monopolies are far less important than in the past, and don’t last as long.
Dominated by several suppliers and a few sellers who control 70 to 80 percent of the market Capital costs are high and it is difficult for new companies to enter market. Goods/services provided by the few sellers are nearly identical. Competition is not based on price but product differentiation is based on consumer perception of the value of one over the other.
All the companies are interdependent; change in one will affect the others. Interdependence can lead to price wars or the illegal act of collusion or teaming up to raise prices. Cartels are international groups that use collusion to seek monopoly power. (ex. OPEC oil cartel)
Numerous sellers Easy entry into market Differentiated product Nonprice competition Some price control by the seller Advertising tries to convince consumers of the superiority of given product, enabling companies to charge more than the market price for a product.
Section 3
Rockefeller monopolized the oil industry by creating interlocking directorates and putting Standard Oil people on boards of the competition. Sherman Antitrust Act (1890) prevented new monopolies or trusts from forming and broke up existing ones. Clayton Act (1914) sought to clarify the laws in Sherman Antitrust Act by prohibiting or limiting a specific number of business practices. Federal government must determine whether merging of two companies will significantly lessen competition.
Horizontal merger is the merging of two corporations in the same business. Vertical merger is merging of two corporations in same chain of supply. Conglomerates are the merging of two corporations involved in at least four or more unrelated businesses.
Government makes laws regarding business pricing and product quality and uses regulatory agencies to oversee that various industries and services obey these laws. Deregulation is when the government removes its regulations to increase competition.