1. Chapter 7 Market Structures

2. Competition

3. The Four Market Structures Market Structure Control Over Price Number of Firms Types of Goods Barriers to Entry Perfect Competition Monopolistic Competition Oligopoly Monopoly None Some A lot Total Many small firms (thousands in real life) Many small firms (hundreds in real life) Few (tens in real life) one Identical; all the same Similar but slightly different Same or different (doesn’t matter) Unique Low; not hard to get into High; very difficult to get into

4. Rank the items in order from most competition to least competition. ___ tomatoes ___ cars ___ electricity ___ notebook paper ___ bottled water ___ dairy farms ___ baseball teams ___ kitchen appliances ___fast food ___ computer software

6. A perfectly competitive market is… …one with a large number of firms all producing essentially the same products.

7. 5 Characteristics of Perfect Competition 1.Many buyers and sellers participate in the market 2.Sellers offer identical products (commodities) 3.Buyers and sellers are well informed about products 4.Sellers are able to enter and exit the market freely 5.No control over prices.

8. Barriers to entry Are any factor that makes it difficult for a new firm to enter the market Barriers to entry into a perfect market can include: o Start-up costs o Technology Barriers to entry can lead to imperfect competition (a market structure that fails to meet the conditions of perfect competition)

9. Prices and Output Prices in a perfectly competitive market are the lowest sustainable prices possible. (Equilibrium) Consumers benefit the most from perfect competition because the prices remain low. Suppliers make decisions about output based on their most efficient use of resources.

10. Monopoly

13. 7 Characteristics of a Monopoly single seller Only 1 unique product Higher prices Limited output Many barriers to entry Economies of scale Government Regulation

14. Economies of Scale Economies of scale are factors that cause a producer’s average cost per unit to fall as output rises. High start-up costs can be spread out among more and more goods as production rises. Example: A hydroelectric plant

15. Natural Monopolies A natural monopoly is a market that runs most efficiently when one large firm provides all of the output. Public water and electricity are natural monopolies because it is more efficient to have a single provider in a geographic area. New technology can destroy a natural monopoly o A new innovation can cut fixed costs for smaller companies (ex. cell phones)

16. Government Monopolies Patents: gives a company exclusive rights to sell a new good or service for a specific period of time. Franchises: contracts that give a single firm the right to sell its goods within an exclusive market. Licenses: government issued right to operate a business.

17. Government Monopolies Decrease the number of suppliers in a market, so it limits competition and is less beneficial to the consumer. Major League Baseball and other sports leagues are granted an exemption to anti-trust laws and allowed to operate as a legal monopoly.

18. Monopolistic Competition and Oligopoly

19. Monopolistic Competition To have monopolistic competition, businesses must sell goods that are similar but not exactly the same in an open market.

20. Monopolistic competition develops from four conditions: 1. Many firms – due to small start-up costs 2. Few artificial barriers – no patents and too many firms 3. Little control over price- price can reflect the product but there are many to compete with. 4. Differentiated products- seller can profit from the differences

21. Nonprice Competition The ability to differentiate products means that firms do not have to compete on price alone. Competition through ways other than price is known as nonprice competition.

22. Forms of Nonprice Competition Physical Characteristics LocationService Level Advertizing (or image) Explain: Example: How it looks; color, texture, size, shape, etc. Where can you buy it?; Convenience. Are you being taken care of or do you need to get it yourself? Brand names, commercials, and word of mouth

23. Prices and Output Prices under monopolistic competition will be higher than they would be in perfect competition, because firms have some power over prices, but they are still lower than a monopoly. Therefore, total output in a monopolistically competitive market also falls somewhere between that of a monopoly and that of perfect competition.

24. 2 market trends that prevent monopolistically competitive firms from increasing their profits… Fierce competitionNew substitutes Rivals will find new ways to differentiate their product to bring customers back Rivalries prevent any one firm from earning excessive profits for long Rivals will find new ways to differentiate their product to bring customers back Rivalries prevent any one firm from earning excessive profits for long New firms enter the market easily with a cheaper product Consumers will switch to these substitutes New firms enter the market easily with a cheaper product Consumers will switch to these substitutes

25. Consumer benefits? Many firms are offering a wide variety of similar goods to choose from. Firms will offer competitive prices and other incentive for consumers to buy their product.

26. Oligopoly An oligopoly describes a market dominated by a few large, profitable firms. An oligopoly can form when significant barriers to entry keep new companies from entering the market to compete with existing firms.

27. Barriers to Entry Pepsi and Coca-cola are an example of an oligopoly. What barriers to entry prevent a smaller company from entering the market? o Brand loyalty and intimidation o High start-up costs for production and equipment.

28. Price War Competing companies in an oligopoly cut prices very low to win business from their rival.

29. How would price fixing and collusion help producers? Competing companies in an oligopoly make an agreement to operate like one large company, or monopoly, in the market with the power to raise prices to increase profit, or cut prices to eliminate smaller competitors.

30. Regulation and Deregulation

31. Is government regulation unconstitutional?

32. Article 1, Section 8, Clause 3 of the U.S. Constitution states: “The Congress shall have the power…To regulate commerce with foreign nations, and among the several states, and with the Indian tribes;”

33. How does the government promote competition? RegulationDeregulation Prevents firms from forming cartels or monopolies Break up monopolies Regulate price Remove regulations on firms that are not natural monopolies Remove barriers to entry Remove price controls

34. When does the government regulate competition? Market power is concentrated to one or a small group of firms. o Trusts Prevent predatory pricing o Selling a product below cost for a short period of time to drive competitors out of the market.

35. Sherman Antitrust Act Passed in 1890 Allows the federal government to assert power over corporations that did business in many states. Prohibits agreements in restraint of trade -- such as price-fixing or refusals to deal -- and forbids monopolies.

36. Standard Oil Co. Inc. John D. Rockefeller (The Richest Man in the World) founder, chairman, and major shareholder American oil producing, transporting, refining, and marketing company. In 1904- controlled 91% of production and 85% of all final sales of oil 1911-Supreme Court declared it an “unreasonable” monopoly and order it to be broken up.