7.1 - Objectives Standard Address 12.1 Students understand common terms & concepts and economics reasoning. 7.1 - Objectives Distinguish the features of perfect competition. Describe the barriers to entry that can create a monopoly. Compare the market structures of monopoly and perfect competition in terms of efficiency.

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CHAPTER 7 Market Structure CONTEMPORARY ECONOMICS 4/26/2017 CHAPTER 7 Market Structure 7.1 Perfect Competition and Monopoly 7.2 Monopolistic Competition and Oligopoly 7.3 Antitrust, Economic Regulation, and Competition CONTEMPORARY ECONOMICS: LESSON 7.1 LESSON 7.1

CHAPTER 7 Market Structure Consider CHAPTER 7 Market Structure What does a bushel of wheat have in common with a share of Microsoft stock? What’s so perfect about perfect competition? Why don’t most monopolies last? Why are some panty hose sold in egg-shaped cartons? Why was OPEC created? Is the U.S. economy more competitive now than it used to be? CONTEMPORARY ECONOMICS: LESSON 7.1

LESSON 7.1 Perfect Competition and Monopoly Key Terms LESSON 7.1 Perfect Competition and Monopoly market structure perfect competition commodity monopoly barriers to entry market power CONTEMPORARY ECONOMICS: LESSON 7.1

Perfect Competition Market structure—important features of a market, including the number of buyers and sellers, product uniformity across sellers, ease of entering the market, and forms of competition CONTEMPORARY ECONOMICS: LESSON 7.1

Perfect Competition Perfect competition—a market structure with many fully informed buyers and sellers of an identical product and ease of entry Many buyers and sellers Firms produce standardize products A commodity is a product that is identical across producers Buyers are fully informed as well as sellers Firms can enter or leave the market easily. There are no obstacles preventing new firms from entering the market. CONTEMPORARY ECONOMICS: LESSON 7.1

Example Markets Share of large corporations Foreign exchange Agricultural products CONTEMPORARY ECONOMICS: LESSON 7.1

Market Structure Market Feature Questions to Ask 1. Number of buyers and sellers Are there many, only a few, or just one? 2. Product’s uniformity across suppliers Do firms in the market supply identical products, or are products differentiated across firms? 3. Ease of entry into the market Can new firms enter easily, or do natural or artificial barriers block them? 4. Forms of competition among firms Do firms compete based only on prices, or are advertising and product differences also important? CONTEMPORARY ECONOMICS: LESSON 7.1

Market Price The market price is determined by the intersection of the market demand curve and the market supply curve. In LARGE MARKETS each firm is so small relative to the market that each has no impact on the market price. CONTEMPORARY ECONOMICS: LESSON 7.1

Market Equilibrium and a Firm’s Curve in Perfect Competition CONTEMPORARY ECONOMICS: LESSON 7.1

What are the features of perfect competition? Checkpoint: pg. 193 What are the features of perfect competition? The Features of perfect competition are: (1) There are many buyers and sellers. (2)Firms produce a standardized product or commodity. (3) Buyers are fully informed about the price, quality, and availability of products, and sellers are fully informed about all resources and technology. (4) Firms can easily enter or leave the industry. CONTEMPORARY ECONOMICS: LESSON 3.3

Monopoly Monopoly is the sole supplier of a product with no close substitutes. Is the extreme opposite of the competition structure. Market power is the ability of a firm to raise its price without losing all sales to rivals. CONTEMPORARY ECONOMICS: LESSON 7.1

Barriers to Entry There are three types of barriers: Essay There are three types of barriers: Legal restrictions Economies of scale A monopoly that emerges from a nature of costs is called a natural monopoly. A new entrant cannot sell enough output to experience the economies of scale enjoyed by an established natural monopoly. Therefore entry is naturally blocked. Geographic monopolies - the only store in town. Control of essential resources CONTEMPORARY ECONOMICS: LESSON 7.1

Monopolists May Not Earn a Profit Although a monopolist is the sole producer of a good with no close substitution, the demand for that good may not be great enough to keep the firm in business. Even a monopoly with iron-clad barriers to entry may go broke. CONTEMPORARY ECONOMICS: LESSON 7.1

Monopolists May Not Earn a Profit Even a monopoly with iron-clad barriers to entry may go broke. CONTEMPORARY ECONOMICS: LESSON 7.1

True Monopolies Are Rare A long lasting monopoly is rare because a profitable monopoly attracts competitors and substitutes. Examples Railroads—trucking industry Local cable TV providers and local phone services—wireless transmission of long-distance telephone calls U.S. Postal Service—fax machines, e-mail, the Internet, FedEx CONTEMPORARY ECONOMICS: LESSON 7.1

Name and describe the three barriers to entry into a market? Checkpoint: pg. 196 Name and describe the three barriers to entry into a market? The barriers to entry into a market are: Legal restrictions Economies of scale And control of essential resources. CONTEMPORARY ECONOMICS: LESSON 3.3

Monopoly and Efficiency Not guaranteed a profit Can lose money Relatively rare CONTEMPORARY ECONOMICS: LESSON 7.1

Monopoly Versus Perfect Competition Competition forces firms to be efficient and to supply the product at the lowest possible price. A monopoly will charge a higher price than competitive firms. With monopoly, consumer surplus shrinks, and is much smaller than consumer surplus with perfect competition. CONTEMPORARY ECONOMICS: LESSON 7.1

Monopoly, Perfect Competitor, and Consumer Surplus CONTEMPORARY ECONOMICS: LESSON 7.1

Other Problems with Monopoly Resources wasted securing monopoly privilege Monopolies may grow inefficient CONTEMPORARY ECONOMICS: LESSON 7.1

Monopoly Might Not Be So Bad Economies of scale Government regulation Keeping prices low to avoid regulation Keeping prices low to avoid competition CONTEMPORARY ECONOMICS: LESSON 7.1

Checkpoint: pg. 198 How does monopoly compare to perfect competition in terms of efficiency? Monopolies, insulated from rigors of market competition, could grow inefficient – unlike perfect competition, which is always perfect. CONTEMPORARY ECONOMICS: LESSON 3.3