W ARM U P 6 1. Why do you think that competition is important? 2. What do consumers gain as a result of competition? 3. Explain how supply and demand determine.

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Presentation transcript:

W ARM U P 6 1. Why do you think that competition is important? 2. What do consumers gain as a result of competition? 3. Explain how supply and demand determine equilibrium price and quantity produced. 4. What is the purpose of a price ceiling? Does it create a shortage or a surplus? 5. What is the purpose of a price floor? Does it create a shortage or a surplus? Welcome Back! Please take out your worksheet on Supply & Demand so we can go over it together.

M ARKET S TRUCTURES Perfect Competition, Monopolistic Competition, Oligopoly, & Monopoly

M ARKET S TRUCTURES Industry: consists of all firms (businesses) making similar or identical products. An industry’s market structure depends on the number of firms in the industry and how they compete. market structure Market Power: how much control that a business has over manipulating the price by manipulating the supply. Barriers to Entry: Factors that prevent or make it difficult for new firms to enter a market. Start up cost, location(natural resources), competition, gov. power, patents, etc.

F OUR B ASIC M ARKET S TRUCTURES Market Power

P ERFECT (P URE ) COMPETITION : Perfect competition happens when many small firms compete against each other. All producers essentially make the same product (homogenous) No barriers to enter the market There are so many firms individual firms cannot impact the price of the good. No market power Price Takers: Sellers take what the buyers will pay Agricultural markets are the closest representation of perfectly competitive markets.

M ONOPOLISTIC COMPETITION : Many competing firms Slightly differentiated product Close substitutes available Few barriers to enter the market Some market power Rely on advertisement Profit maximizers Toothpastes, toilet papers, clothing companies, restaurants

O LIGOPOLY Small number of firms Lots of market power Slightly differentiated products Many barriers to enter Mutually Independent: individual producers can impact the market. Strategic pricing/ marketing Tactics Oligopolies Sometimes Use: Collusion: secret agreement between firms to limit competition & gain unfair market advantages Predatory Pricing: deliberately lowering prices to force competition out of the market.

M ONOPOLY ONE firm Unique product Total market power = Price Maker can be very harmful for consumers Anti-Trust Laws- gov. regulations to control the powers of monopolies Reasons for the existence of a monopoly: Extreme barriers to enter, high cost, gov. licensing, gov. grants, gov. patents, brand loyalty, advertising Natural Monopoly: firm that produces the entire output of a market at a lower cost than if there were several firms. Ex) Utilities (Water, Power, Natural Gas)

Horizontal Integration Vertical Integration