Perfect Competition: 9.1

Market Structure: In this chapter, you will learn that businesses are categorized by market structure. Market Structure: amount of competition a business will face. The first type of market structure is called perfect competition, which is sometimes referred to as “pure competition”.

Characteristics of Perfect Competition: 1.large market: many buyers and sellers 2.similar products: sellers offer identical products. 3.information: buyers and sellers are well informed about products. 4.Low barriers to entry: sellers are able to enter and exit the market freely. 5.Independence: sellers and buyers working together to control price is almost nonexistant.

Prices and Output: Perfect markets are efficient due to competition. Prices are usually low. Production cost are also usually low.

Products: Perfect or pure markets usually deal in commodities. Commodities: Products that are considered the same regardless of who makes them. ex: staples, paper clips, milk and other type of agriculture

Barriers to Entry: Barriers to entry: Factors which make it difficult for new firms to enter a market. 2 most common barriers to entry: 1.start-up cost: the expenses that a new business must pay before their product reaches the customer. (ex: auto industry) 2.Technology: Some market require a high degree of technological know-how. (plumbing, electrician)

Bell Work: 1/6/12 What are the two most common barriers to entry? What are commodities?

Types of Imperfect Market Structures: 9.2

Monopoly: The most extreme case of an imperfect market is a monopoly. Monopoly: a market structure in which a single firm controls the supply of the good or service, as well as the price. Problem of monopolies: they can take advantage of their market power and charge higher prices.

Characteristics of a Monopoly 1. One firm 2. Complete barrier to entry 3. Usually only one type of product available 4. Complete control over prices

Types of Monopolies: 1.) Natural Monopoly: When it make sense, and is more efficient, to allow only one business to operate. (water, Smart buses) 2.) Government monopoly: Monopoly that is created by the government itself. (ex: construction of roads, bridges) 3.) Geographic Monopoly: Monopoly caused by geographic factors. (ex: general store in a remote Alaskan town.

4.) Technological Monopoly: If you invent something you are capable of having a technological monopoly over your invention. (ex:) patent- gives a person the exclusive right to manufacture, rent, or sell their invention for a certain number of years. copyright- basically a patent on art or written works. Copyrights last for the life of the creator, plus 70 years.

Oligopoly: Oligopoly: A market structure dominated by a few large, profitable firms. (ex: breakfast cereal, air travel) Economists usually call an industry an Oligopoly if the four largest firms produce at least 70-80% of the total output. Car companies, airlines, and phone companies are all examples of an oligopoly.

Characteristics of an Oligopoly: 1.few sellers. 2.High barriers to entry. 3.Identical or slightly different products. 4.Non-price competition: 5.Interdependence

Problems with Oligopolies: Collusion: an agreement among firms of an oligopoly to set prices and production. (Usually used make greater profits) Cartels: an agreement among firms to set prices and production in order to keep new firms from entering the industry. Price Fixing- an agreement among firms to sell at the same or similar prices * All are illegal in the United States.

Monopolistic Competition: Large number of sellers offer similar, but slightly different products. Each firm has some control over price. Usually brand-name items such as; toothpaste, cosmetics, and designer clothes Competitive advertisement is very important in monopolistic competition. When successful, advertising allows some firms to sell their product at higher prices.

Characteristics of Monopolistic Competition: 1. Numerous Sellers 2. Low barriers to entry 3. Differentiated products 4. Non-price competition 5. Some control over price

Bell Work: List the 3 types of imperfect market structure.

Government Policies Toward Competition: 9.3

Antitrust legislation: Antitrust Legislation: law to prevent new monopolies or trusts from forming, and to break up those that already exist. Sherman Antitrust Legislation: basically outlawed monopolies. Clayton Act: Another law to protect competition. Allowed the government to make the final decision on some business mergers.

Regulatory Agencies: Besides antitrust legislation, the government uses regulatory agencies that oversee various industries. Fed. Trade commission, which regulates warranties, fraud in advertising. Food and Drug Administration, regulates purity and food safety Securities and Exchange Commission, regulates the sale of bonds, stocks and other investments Occupational Safety and Health Admin. (OSHA): regulates workplace environments

Deregulation: Deregulation: Means the government no longer decides what role each company can play in the market and how much it can charge its customers. Banks Trucking industry Airlines Railroads

Quiz: 1.List the 4 types of market structures we have discussed. 2.What is antitrust legislation? 3.What did the Clayton Act do? 4.Which type of market structure is characterized by many firms, that produce exactly the same type of good? 5.What is a start-up?