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Section 1: Competition and Market Structures
Chapter Introduction Section 1: Competition and Market Structures Section 2: Market Failures Section 3: The Role of Government Visual Summary Chapter Menu

A developer has acquired the large piece of vacant land across the street from your house and plans to build a large shopping mall on the property. How might you benefit from the mall? How might it negatively impact your life? Read Chapter 7 to learn about market structures and economic growth. Chapter Intro 1

1. The profit motive acts as an incentive for people to produce and sell goods and services.
2. Economists look at a variety of factors to assess the growth and performance of a nation’s economy. 3. Governments strive for a balance between the costs and benefits of their economic policies to promote economic stability and growth. Chapter Intro 2

Chapter Intro-End

Section Preview In this section, you will learn that market structures include perfect competition, monopolistic competition, oligopoly, and monopoly. Section 1-Preview

Content Vocabulary laissez-faire market structure perfect competition
imperfect competition monopolistic competition product differentiation nonprice competition oligopoly collusion price-fixing monopoly natural monopoly economies of scale geographic monopoly technological monopoly government monopoly Section 1-Key Terms

Academic Vocabulary theoretically equate Section 1-Key Terms

C. Can make a better product
What is the incentive for people to produce and sell goods and services? A. Competition B. Profit motive C. Can make a better product A B C Section 1

Competition and Market Structures
In 1776, the average factory was small and businesses were competitive. Laissez-faire was the economic philosophy. The supply side of the market today has many firms of different sizes producing slightly different products. These conditions help determine market structure. Section 1

Competition and Market Structures (cont.)
Economists group businesses into four market structures. Section 1

Perfect Competition Perfect competition is an ideal market situation used to evaluate other market structures. Section 1

Perfect Competition (cont.)
Perfect competition—a theoretical ideal used to evaluate other market structures Perfect Competition and Profit Maximization Section 1

Perfect competition has five necessary conditions: 1. There is a large number of buyers and sellers. 2. Buyers and sellers deal in identical products. 3. Each buyer and seller acts independently. 4. Buyers and sellers are well informed about prices and products. 5. Buyers and sellers are free to enter, conduct, and shut down. Section 1

Market supply and demand set the product’s equilibrium price. Few perfectly competitive markets exist. Section 1

Imperfect competition results in Less competition Higher prices for consumers Fewer products offered Section 1

Why do so few perfectly competitive markets exist?
A. Prices offered are too high for consumers. B. Difficult to satisfy all five necessary conditions C. Overhead costs are too high to make it work. D. Too competitive to be successful A B C D Section 1

Monopolistic Competition
Monopolistic competition shares all the conditions of perfect competition except the same goods or services. Section 1

Monopolistic Competition (cont.)
Under monopolistic competition, products are similar. Monopolistic—seller’s ability to raise the price within a narrow range Competitive—If sellers raise or lower the price enough, customers will ignore minor differences and change brands. Section 1

Monopolistic Competition (cont.)
Monopolistic competition is characterized by product differentiation. This is done through nonprice competition. Section 1

Are designer labels really better than store brand names when it comes to shoes, clothing, or makeup? A. Absolutely B. Sometimes C. Never A B C Section 1

Oligopoly Oligopoly describes a market in which a few sellers dominate an industry. Section 1

Oligopoly (cont.) Oligopoly products may have distinct features like makes and models in the auto industry; or products that can be standardized as in the steel industry. Section 1

Oligopoly (cont.) Because oligopolies are so large, when one firm lowers its price or introduces a new product, other firms follow. This interdependent behavior takes the form of collusion. Price-fixing Collusion restrains trade and is against the law. Section 1

What are the ramifications of collusion?
A. All firms within an industry benefit. B. Against the law C. Leads to lower prices for the consumer D. Several of the above answers are true. A B C D Section 1

Monopoly A monopoly is a market with only one seller for a particular product. Section 1

Monopoly (cont.) Monopoly is at the opposite end of the spectrum from perfect competition. Few real monopolies exist today. Americans dislike them. New technologies compete with existing monopolies. Characteristics of Market Structures Section 1

Monopoly (cont.) Types of monopolies Natural monopoly
Government gives a public utility a franchise. Economies of scale Section 1

Monopoly (cont.) Types of monopolies Geographic monopoly
Technological monopoly—Government grants a patent or copyright. Government monopoly Profiles in Economics: Bill Gates Section 1

Compared to an oligopoly industry, what kind of prices do consumers in a monopoly pay?
A. Higher B. Lower C. The same A B C Section 1

Section 1-End

Section Preview In this section, you will find out that inadequate competition, inadequate information, immobile resources, public goods, and externalities can lead to market failures. Section 2-Preview

Content Vocabulary Academic Vocabulary market failure public goods
externality negative externality positive externality Academic Vocabulary collude sustain Section 2-Key Terms

Are you familiar with any businesses today that may engage in price-fixing?
A. Yes B. No C. Maybe A B C Section 2

Types of Market Failures
Markets can sometimes fail because of inadequate competition, inadequate information, resource immobility, public goods, and externalities. Section 2

Types of Market Failures (cont.)
Five main causes of market failure Inadequate competition Inadequate information Resource immobility Public goods Section 2

Types of Market Failures (cont.)
Five main causes of market failure Externalities Negative externality Positive externality Section 2

How does inadequate information lead to market failure?
A. Profits spent on executives B. Positive externalities result C. Slow drain on the economy A B C Section 2

Dealing with Externalities
Externalities indicate a market failure and can be corrected with government action. Section 2

Dealing with Externalities (cont.)
Externalities distort decisions made by consumers and producers, resulting in a less efficient economy. Section 2

Correcting negative externalities Government adds a tax onto products sold by the firm. Firms have less incentive because the tax increases their product’s price. Higher prices reduce quantity demanded. People affected may face fewer problems. Section 2

Correcting positive externalities Subsidizing local programs, such as education, helps communities. Programs are expensive and many are left underfunded. Section 2

B. May not change the community much
Do you think a fully paid educational program for all citizens, from preschool through college, would make communities substantially better than they are? A. Absolutely B. May not change the community much C. Won’t change the community at all A B C Section 2

Section 2-End

Section Preview In this section, you will learn that one of the economic functions of government in a market economy is to maintain competition. Section 3-Preview

Content Vocabulary Academic Vocabulary trust price discrimination
cease and desist order public disclosure Academic Vocabulary restrained intervention Section 3-Key Terms

Have you or your family ever had a product you purchased recalled?
A. Yes B. No A B Section 3

Maintain Competition The government exercises its power to maintain competition within markets. Section 3

Maintain Competition (cont.)
Two ways government maintains competitive markets Prohibiting market structures that are not competitive Regulating markets where full competition is not possible Section 3

Laws have historically been passed to restrict monopolies and trusts. Congress passed the Sherman Antitrust Act in 1890. Clayton Antitrust Act in 1914 outlawed price discrimination. Anti-Monopoly Legislation Section 3

Laws have historically been passed to restrict monopolies and trusts. Federal Trade Commission Act gave authority to issue a cease and desist order. Anti-Monopoly Legislation Section 3

Natural monopolies are not necessarily bad and therefore should not be broken up. Many monopolies are regulated by government agencies. Federal Regulatory Agencies Section 3

Which governmental agency oversees our air and water?
A. Federal Trade Commission B. Environmental Protection Agency C. Food and Drug Administration A B C Section 3

Improve Economic Efficiency
Providing public goods and promoting transparency can improve economic efficiency. Section 3

Improve Economic Efficiency (cont.)
Efficient and competitive markets need adequate and transparent information. Therefore, public disclosure is paramount to economic efficiency. Section 3

Truth-in-advertising laws Consumer lending laws Securities and Exchange Commission Government documents, studies, and reports are available in public libraries. Section 3

Government provides many public goods because a free economy does not promote them. Public goods, like decent roads and highways, make the economy more productive. Firms need an educated workforce. Section 3

Why is public disclosure so important to consumers?
A. Protects workers B. Protects retirement and stock investments C. Promotes safe products and services D. All of the above A B C D Section 3

Modified Free Enterprise
Because the government is involved in certain aspects of our economy, it is a modified version of free enterprise. Section 3

Modified Free Enterprise (cont.)
A modified free enterprise economy is a result of the U.S. economy evolving over time. Government has a responsibility to protect the rights of workers and protect consumers from false claims, harmful products, and price gouging. Section 3

Modified Free Enterprise (cont.)
Now government concerns are focused on promoting economic efficiency by supplying public goods and promoting transparency. Section 3

Is government intervening enough when it comes to identity theft, which has become so rampant today?
A. More work needs to be done by the government. B. More work needs to be done by the private sector instead of the government. C. Both the public and private sectors need to help curtail this problem. D. There is no problem and therefore nothing needs to be done. A B C D Section 3

Section 3-End

Market Structures We can differentiate among four different market structures. One is called perfect competition; the other three are different kinds of imperfect competition. VS 1

Market Failures When one of the conditions necessary for competitive markets does not exist, market failures can occur. Markets usually fail because of one of five factors. VS 2

Government Roles In order to carry out its legal and social obligations, the government can encourage competition and regulate monopolies. VS 3

VS-End

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Bill Gates (1955– ) co-founder and chairman of Microsoft Corporation
ranked the richest man in the world for 12 years in a row Profile

Select a transparency to view.
Economic Concepts Transparencies Transparency 9 Competition and Market Structure Transparency 11 Market Failures Transparency 12 The Role of the Government Select a transparency to view. Concept Trans Menu

Concepts Trans 1

Concepts Trans 2

Concepts Trans 3

DFS Trans 1

DFS Trans 2

DFS Trans 3

laissez-faire philosophy that government should not interfere with business activities Vocab1

market structure nature and degree of competition among firms in the same industry Vocab2

perfect competition market structure with many well-informed and independent buyers and sellers who exchange identical products Vocab3

imperfect competition
market structure that does not meet all conditions of perfect competition Vocab4

monopolistic competition
market structure that meets all conditions of perfect competition except identical products Vocab5

product differentiation
real or imagined differences between competing products in the same industry Vocab6

nonprice competition sales strategy focusing on a product’s appearance, quality, or design rather than its price Vocab7

oligopoly market structure in which a few large sellers dominate the industry Vocab8

collusion agreement, usually illegal, among producers to fix prices, limit output, or divide markets Vocab9

price-fixing agreement, usually illegal, by firms to charge the same price for a product Vocab10

monopoly market structure with a single seller of a particular product
Vocab11

natural monopoly market structure where average costs of production are lowest when a single firm exists Vocab12

economies of scale situation in which the average cost of production falls as a firm gets larger Vocab13

geographic monopoly market structure in which one firm has a monopoly in a geographic area Vocab14

technological monopoly
monopoly based on a firm’s ownership or control of a production method, process, or other scientific advance Vocab15

government monopoly a monopoly owned and operated by the government
Vocab16

theoretically existing only in theory; not practical Vocab17

equate to represent as equal or equivalent Vocab18

market failure condition that causes a competitive market to fail
Vocab19

public goods goods or services whose benefits are available to everyone and are paid for collectively Vocab20

externality economic side effect that affects an uninvolved third party Vocab21

negative externality harmful side effect that affects an uninvolved third party Vocab22

positive externality beneficial side effect that affects an uninvolved third party Vocab23

collude to act together in secret, especially with harmful or illegal intent Vocab24

sustain to support or hold up Vocab25

trust illegal combination of corporations or companies organized to hinder competition Vocab26

price discrimination practice of selling the same product at different prices to different buyers Vocab27

cease and desist order ruling requiring a company to stop an unfair business practice that reduces or limits competition Vocab28

public disclosure requirement that a business reveal information about its products or its operations to the public Vocab29

restrained limited the activity or growth of Vocab30

intervention involvement in a situation to alter the outcome Vocab31

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