7-1: WHAT IS PERFECT COMPETITION?

Competition  Economists classify markets based on how competitive they are  Market structure: an economic model of competition among businesses in the same industry

Perfect Competition  Definition: ideal model of a market economy  Perfect competition is used as a basis to determine how competitive a market is

5 Characteristics of Perfect Competition  1. Numerous buyers and sellers  This ensures that no single buyer or seller has the power to control the price in the market

5 Characteristics of Perfect Competition (continued)  Buyers have lots of options Sellers are able to sell their products at market price

 2. Standardized product  A product that consumers see as identical regardless of the producer Example: milk, eggs, etc.

Characteristics of Perfect Competition (continued)  3. Freedom to enter and exit markets  Producers enter the market when it is profitable and exit when it is unprofitable

Characteristics of Perfect Competition (continued)  4. Independent buyers and sellers  This allows supply and demand to set the equilibrium price

Characteristics of Perfect Competition (continued)  5. Well-informed buyers and sellers  Buyers compare prices  Sellers know what consumers are willing to pay for goods

Price Taker  When these 5 conditions are met, sellers become price takers—a business that accepts the market price determined by supply and demand

Imperfect Competition  Market structures that lack one of the conditions needed for perfect competition are examples of imperfect competition  This means there are only a few sellers and/or products are not standardized Examples: corn and beef markets

7-2: THE IMPACT OF MONOPOLY

Characteristics of a Monopoly  Monopoly: a market structure in which only one seller sells a product for which there are no close substitutes  Pure monopolies are rare

Characteristics of a Monopoly (continued)  A cartel is close to a monopoly  Cartel: a group of sellers that act together to set prices and limit output  Example: OPEC—11 nations hold more than 2/3 of the world’s oil reserves

Characteristics of a Monopoly (continued)  A monopoly is a price maker—a business that does not have to consider competitors when setting the price of its product  Consumers accept the price of the product

Characteristics of a Monopoly (continued)  Other firms struggle to enter the market due to a barrier to entry— something that stops the business from entering a market

3 Characteristics of Monopolies  1. Only One Seller  Supply of product has no close substitutes

3 Characteristics of Monopolies  2. A Restricted, Regulated Market  In some cases, government regulations allow a single firm to control a market (think utilities)

3 Characteristics of Monopolies  3. Control of Prices  Prices are controlled since there are no close substitutes

Types of Monopolies  First, not all monopolies are harmful  Natural monopoly: occurs when the costs of production are lowest with only one producer

Types of Monopolies (continued)  Example of a natural monopoly= public utilities. It would be inefficient to have more than one a water company competing for customers.  A single supplier would be most efficient according to economies of scale: when the average cost of production falls as the producer grows larger

Types of Monopolies (continued)  Government monopoly: exists because the government wither owns and runs the business or authorizes only one producer  Example: U.S. Postal Service

Types of Monopolies (continued)  Technological monopoly: occurs when a firm controls a manufacturing method, an invention, or a type of technology  Example: a patent, where an inventor has exclusive rights to that invention or process for a certain number of years

Types of Monopolies (continued)  Geographic monopoly: exists when there are no other producers within a certain region  Example: professional sports teams

Questions  1. Suppose that you went to a farmers’ market and found several different farmers selling cucumbers. Would you be likely to find a wide range of prices for cucumbers? Why or why not?

 2. What would happen to a wheat farmer who tried to sell his wheat for $2.50 per bushel if the market price were $2.00 per bushel? Why?

 3. In 2003, 95% of the households on the U.S. had access to only 1 cable TV company in their area. What type of monopoly did cable TV companies have? Explain your answer.

 4. In 2002 the patent on the antihistamine Claritin expired. Using the 3 characteristics of a monopoly, explain what happened to the market for Claritin when the patent expired.