2. The 4 Market Structures

3.  Competition among producers and sellers leads to more choices, improved quality, and lower prices as producers seek to attract customers away from other businesses.  Competition among consumers leads to higher prices and allocates goods to those willing to pay the most (e.g., several buyers bidding at an auction push the price up).

4.  Perfect Competition: A market structure in which a large number of firms all produce the same product, and no single seller controls supply or prices › There are factors that prevent perfect competition in most markets

5.  For perfect competition there must be four conditions: 1) Many buyers and sellers in the market 2) Sellers offer standardized products (nearly the same) 3) Buyers and sellers must be well informed 4) Sellers must easily be able to get into and out of the market

6.  If there are too few sellers, one seller’s actions would have a great impact on the whole market  Example: One seller raises its prices, buyers will go buy from other sellers

7.  Products must be the same or nearly the same  This means that buyers would be swayed by price alone, not the special features of a product  A product that is pretty much the same regardless or who makes or sells it is a commodity  Example: Corn grown in one field is pretty much the same as the corn grown in another field

8.  In a free market, there can be no barriers to entry  Barrier to Entry: any factor that makes it difficult for a new firm to enter a market  No government controls and no labor unions  If profitable, businesses can join- if losing money businesses can leave when they want

9.  A condition when there is no competition in the market  A pure monopoly has three characteristics › There is only one seller › There are no close substitutes › Getting into and out of the market is difficult

10.  Government Monopoly: a form of monopoly in which a government agency or government corporation is the sole provider of a particular good or service and competition is prohibited by law. › Can exist at any level of the government › Examples: law and the legitimate use of physical force.

11.  Many companies compete to sell products that are almost the same  Each firm has a monopoly over its own product  Key difference: The goods are enough alike that they can be easily substituted for one another  Example: Pizza Parlors

12.  Conditions: › Many firms › Few Barriers to Entry › Little Control over price › Differentiated products

13.  A market structure in which a few large firms dominate the market  Three main features › Few sellers in the market: Four largest firms produce at least 70 to 80 percent of the output › A nearly standardized product: Products are nearly the same, with minor differences › Difficulty entering the market: High start-up costs, expensive to maintain, tough to break customer loyalty

14.  The price each seller sets depends on the price the other sellers set  If one seller cuts prices it will set off a price war  Each seller will then continue to decrease prices to gain control  Sometimes they set prices so low that profits for the whole industry start to fall

15.  Collusion: An illegal agreement among firms to divide the market, set prices, or limit production › Each firm is guaranteed a market with little competition  Collusion is illegal in the United States!!!!

16.  Market Power is the ability of a firm to control prices and total market output  If one firm, or a few large ones, control a market, it often has higher prices and lower output  Predatory Pricing: A firm sells a product below cost for a short period of time to drive competitors out of the market

17.  Put in place antitrust laws to encourage competition in the marketplace  Puts forward effort to stop monopolies from forming  Can block mergers if it predicts the merger will have negative impacts on the market and create a monopoly

18.  Find your identical Letter Partner.  Using PowerPoint or Prezi put together a graphic organizer explaining the key elements of the 4 market structures.  Include key facts such as amount of competition, product differentiation, and real life examples.  Submit to me at RowanRj@pwcs.edu at the end of class.RowanRj@pwcs.edu