1. [ 4.1 ] Pure Competition
Pure Competition

2. Competition – economic rivalry among businesses.
Market Structure – degree of competition
among firms operating in the same market (autos).

3. Conditions for Pure Competition
You have decided to cook dinner. As you shop for produce at the local farmer’s market, you see many fruits and vegetables being offered by several different suppliers. Yet each supplier charges the same price for these fruits and vegetables. On the way home, you wonder why buying a leather jacket, a car, or a high-definition television isn’t as simple as buying produce at the local farmer’s market.

4. Market Conditions of Pure Competition
Very Large number of Buyers and Sellers
Similar or Identical Products
Informed buyers and sellers-no need for advertising
Easy entry and exit (no barriers to entry)
commodity- a product that’s the same regardless of who makes or sells it (gas, milk)

5. Conditions for Pure Competition
A purely competitive market has many suppliers selling identical products called commodities. Analyze Information Why isn’t the market for automobiles a purely competitive market?

6. Pure or Limited Competition
Free Market Entry and Exit
Few buyers and sellers
Informed buyer and sellers
Different product
Difficult market entry and exit
Identical products
Many buyers and sellers
Pure Competition
Limited Competition

7. Barriers to Entry Can lead to imperfect competition
Technology- markets that require a high degree of technology are not found in a perfect competition market
Start-up costs- expenses a new business must pay before the first product reaches the customer
Markets with high start up costs are not found in a perfectly competitive market
Ex.: the start up cost of a sandwich shop is much lower than a movie production company

8. Barriers to Entry and Competition
A movie production company requires so much equipment that it usually has high start-up costs.

9. Price, Output, and Purely Competitive Markets
Purely competitive markets are efficient.
Competition within these markets keeps both prices and production costs low.
Firms must use all inputs—land, labor, organizational skills, machinery and equipment—to their best advantage.
Prices that consumers pay and the revenue that suppliers receive accurately reflect how much the market values the inputs used to produce the product.
In a purely competitive market, prices correctly represent the opportunity costs of each product.

10. Price, Output, and Purely Competitive Markets

11. In pure competition, suppliers must match the lowest supplier’s price or exit the market.?
Why are consumers unwilling to pay one supplier’s higher price in such a market?

12. Quiz: Conditions for Pure Competition
Why are individual suppliers unable to set their own prices in a purely competitive market?
A. Their products are too unique to generate demand.
B. The market is flooded with excessive supply.
C. They do not have enough influence over the market.
D. Government price fixing takes away their freedom of action.

13. Quiz: Barriers to Entry and Competition
Which type of business would have the lowest technological barrier to entry?
A. dog walking
B. medical laboratory
C. payroll processing firm
D. smartphone app development

14. Quiz: Price, Output, and Purely Competitive Markets
Why is a purely competitive market undesirable for owners of supplier firms in that market?
A. high revenues
B. high wages
C. low costs
D. low profits

15. [ 4.2 ] Monopolies

16. A monopoly is classified as a single seller that controls an entire market.
This arrangement allows monopolies to control output and charge higher prices.

17. Characteristics of a monopoly
Single Seller & Multiple buyers
Barriers to enter
Unique product

18. Characteristics of a Monopoly
Economies of Scale
Natural Monopolies
Technology and Change

19. Characteristics of a Monopoly
Some scientists believe the average cost of developing a new drug is about $1 billion. High development costs such as these are a barrier to entry that can lead to monopolies.

20. Characteristics of a Monopoly
In a monopoly, one company controls the entire market. What are some barriers to entry that might allow a monopoly to exist?

21. What are some barriers to entry that might allow a monopoly to exist?
high start-up costs
control or knowledge of technology that other firms do not have.

22. Characteristics of a Monopoly
With economies of scale, production costs continue to fall as output increases.
When economies of scale do not exist, increasing production beyond a certain point becomes costly. Other firms may enter the industry and produce additional units profitably.

23. The Role of Government Technological Monopolies
Franchises and Licenses
Industrial Organizations

24. The role of the governement
A government monopoly is a monopoly created by the government.

25. Technological Monopolies
The government can give a company monopoly power by issuing a patent.
A patent gives a company exclusive rights to sell a new good or service for a specific period of time.

26. The Role of Government
The patents shown here have given their inventors monopolies for a limited period of time.
How do patents such as these encourage new ideas?

27. Patents guarantee that companies can profit from their own research without competition. Patents encourage firms to research and develop new products that benefit society as a whole A patent allows firms to set prices that maximize their opportunity to make a profit. By protecting patent rights, the government encourages innovations in industries.

28. Franchises  
A franchise is a contract issued by a local authority that gives a single firm the right to sell its goods within an exclusive market. National companies often grant franchises to entrepreneurs, who then sell that company’s product in a local market.

29. The government entity can also grant a franchise.
Franchises
 The government entity can also grant a franchise.
For example, the National Park Service picks a single firm to sell food and other goods at national parks such as Yellowstone, Yosemite, and the Everglades.
Your school may have contracted with one bottled-water company to install and stock vending machines. The franchise may include a condition that no other brand of water will be sold in the building.
Governments, parks, and schools use franchises to keep small markets under control.

30. Licenses
Governments can issue a license  granting firms the right to operate a business, especially where scarce resources are involved.
Examples of scarce resources that require licensing include land, as well as radio and television broadcast frequencies. The Federal Communications Commission issues licenses for individual radio and television stations.
Local governments might give a single firm a license to manage all of their public parking lots.

31. Industrial Organizations
The government allows the companies in an industry to restrict the number of firms in a market. 
Ex. National Football League
The US government lets the NFL and other sports leagues to restrict the number and location of their teams.
The government allows team owners of the major professional sports leagues to choose new cities for their teams and does not charge them with violating the laws that prevent competitors from working together.
The problem with this type of monopoly is that team owners may charge high prices for tickets. In addition, if you’re a sports fan in a city without a major league team, you’re out of luck.

32. Output Decisions The Monopolist’s Dilemma- Falling Marginal Revenue
Setting a Price
Profits

33. The Monopolist’s Dilemma
The law of demand states that buyers will demand more of a good at lower prices and less at higher prices.
Many people with life-threatening asthma will pay whatever the medicine costs. But some people with milder asthma will choose a cheaper, weaker medicine if the price of a stronger one rises too high.

34. Falling Marginal Revenue
 To maximize profits, a seller should set its marginal revenue, or the amount it earns from the last unit sold, equal to its marginal cost, or the extra cost from producing that unit. This same rule applies to a firm with a monopoly.
The key difference is that in a purely competitive market, marginal revenue is always the same as price, and each firm receives the same price no matter how much it produces. Neither assumption is true in a monopoly.

35. This is the point at which marginal revenue is equal to marginal cost.
Setting a Price
A company will choose a level of output that yields the highest profits.
This is the point at which marginal revenue is equal to marginal cost.

36. Profit How much profit does the monopolist earn?
Profit can be determined by comparing price and average cost.

37. Output Decisions
Analyze Graphs In what year do the prices of prescription drugs diverge from the prices of the general price index?

38. Output Decisions
A company that has a monopoly on a particular product, such as a new drug, may find that increasing output lowers its marginal revenue. The more product available the cheaper the price will be.

39. Price Discrimination
Most assume that the monopolist must charge the same price to all consumers. But in some cases, the monopolist may be able to divide consumers into two or more groups and charge a different price to each group. This practice is known as price discrimination.
Price discrimination is based on the idea that each customer has a maximum price that he or she will pay for a good. If a monopolist sets the good’s price at the highest maximum price of all the buyers in the market, the monopolist will sell only to the one type of customer willing to pay that much.
If the company sets a low price, the company will gain a lot of customers but will lose the profits it could have made from the customers who bought at the low price but were willing to pay more.

40. Targeted Discrimination
In the monopolist’s ideal world, the firm could charge each customer the maximum that he or she is willing to pay, and no less. However, this is impractical, so companies divide consumers into large groups and design pricing policies for each group. The different prices that firms charge each group for the same good or service are not related to production costs.

41. Examples of Price Discrimination
Discounted airline fares Airlines offer discounts to travelers who buy tickets several weeks in advance or are willing to spend a Saturday night at their destinations. Business travelers would prefer not to stay over on a Saturday night, but these tickets are appealing to vacationers who wouldn’t otherwise pay to fly and don’t mind the restrictions.
Manufacturers’ rebate offers At times, manufacturers of refrigerators, cars, televisions, and other items will refund a small part of the purchase price to buyers who fill out a rebate form and mail it back. People who take the time to fulfill the rebate requirements are likely more price-conscious than those who don’t and may be unwilling to pay full price.
Senior citizen or student discounts Many retirees and students have lower incomes than people who work full time. Zoos, theaters, museums, and restaurants often offer discounts to people in these groups, because they are unlikely to be able to pay full price for what some consider luxuries.

42. Limits of Price Discrimination
 For price discrimination to work, a market must meet three conditions:
1. Firms that use price discrimination must have some market power
2. Customers must be divided into distinct groups
3. Buyers must not be in a position in which they can easily resell the good or service.

43. Price Discrimination
Analyze Charts Why are distinct customer groups an essential component of price discrimination?

44. Price Discrimination
Analyze Charts Would a monopolist benefit from setting the same price for every person? Why or why not?

45. Price Discrimination
Analyze Political Cartoons What is this political cartoon saying about the usefulness of price discrimination for airfares?

46. Quiz: Characteristics of a Monopoly
What do all types of monopolies have in common?
A. economies of scale
B. a single seller that controls an entire market
C. government action to ensure that prices don’t get too high
D. a unique product to sell

47. Quiz: The Role of Government
How does having a patent give a company a monopoly?
A. A patent is a contract issued by a local authority that gives a single firm the right to sell its goods within an exclusive market.
B. A patent gives firms the right to operate a business, especially where scarce resources are involved.
C. A patent gives a company exclusive rights to sell a new good or service for a period of time.
D. A patent allows the companies in an industry to restrict the number of firms in a market.

48. Quiz: Output Decisions
What happens if a monopolist increases the price of a good?
A. The monopolist will sell less.
B. The monopolist will sell more.
C. Sales will not change.
D. Government intervention will be required.

49. Quiz: Price Discrimination
Price discrimination can only work if
A. a group of firms determines the highest maximum price.
B. customers can resell the good for a lower price.
C. prices are discounted by the age of the customer.
D. firms have some control over the price.