1. Turn to page 2 in your ISN
Today will focus on Types of Market structures.
We will quiz on this on Thursday!

2. Before we start let’s refresh on some vocab
What is Perfect Competition? What is an Oligopoly (think cartel)/ What is a monopoly?

6. Perfect Competition
What conditions must exist for perfect competition?
What are barriers to entry and how do they affect the marketplace?
What are prices and output like in a perfectly competitive market?

7. The Four Conditions for Perfect Competition
Perfect competition is a market structure in which a large number of firms all produce the same product.
1. Many Buyers and Sellers
There are many participants on both the buying and selling sides.
2. Identical Products
There are no differences between the products sold by different suppliers.
3. Informed Buyers and Sellers
The market provides the buyer with full information about the product and its price.
4. Free Market Entry and Exit
Firms can enter the market when they can make money and leave it when they can't.

8. Barriers to Entry
Factors that make it difficult for new firms to enter a market are called barriers to entry.
Start-up Costs
The expenses that a new business must pay before the first product reaches the customer are called start-up costs.
Technology
Some markets require a high degree of technological know- how. As a result, new entrepreneurs cannot easily enter these markets.

9. Price and Output
One of the primary characteristics of perfectly competitive markets is that they are efficient. In a perfectly competitive market, price and output reach their equilibrium levels.
Market Equilibrium in Perfect Competition
Quantity
Price
Demand
Equilibrium Price
Equilibrium Quantity
Supply

10. Section 1 Assessment
1. Which of the following is NOT a condition for perfect competition?
(a) many buyers and sellers participate
(b) identical products are offered
(c) market barriers are in place
(d) buyers and sellers are well-informed about goods and services
2. How does a perfect market influence output?
(a) Each firm adjusts its output so that it just covers all of its costs.
(b) Each firm makes its output as large as possible even though some goods are not sold.
(c) Different firms make different amounts of goods, but some make a profit and others do not.
(d) Different firms each strive to make more goods to capture more of the market.
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11. Section 1 Assessment
1. Which of the following is NOT a condition for perfect competition?
(a) many buyers and sellers participate
(b) identical products are offered
(c) market barriers are in place
(d) buyers and sellers are well-informed about goods and services
2. How does a perfect market influence output?
(a) Each firm adjusts its output so that it just covers all of its costs.
(b) Each firm makes its output as large as possible even though some goods are not sold.
(c) Different firms make different amounts of goods, but some make a profit and others do not.
(d) Different firms each strive to make more goods to capture more of the market.
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12. Monopoly How do economists define the word monopoly?
How are monopolies formed?
What is price discrimination?
How do firms with monopoly set output?

13. Defining Monopoly A monopoly is a market dominated by a single seller.
Monopolies form when barriers prevent firms from entering a market that has a single supplier.
Monopolies can take advantage of their monopoly power and charge high prices.

14. Different market conditions can create different types of monopolies.
Forming a Monopoly
Different market conditions can create different types of monopolies.
1. Economies of Scale
If a firm's start-up costs are high, and its average costs fall for each additional unit it produces, then it enjoys what economists call economies of scale. An industry that enjoys economies of scale can easily become a natural monopoly.
2. Natural Monopolies
A natural monopoly is a market that runs most efficiently when one large firm provides all of the output.
3. Technology and Change
Sometimes the development of a new technology can destroy a natural monopoly.

15. Government Monopolies
A government monopoly is a monopoly created by the government. (Postal Service)
Technological Monopolies
The government grants patents, licenses that give the inventor of a new product the exclusive right to sell it for a certain period of time.
Franchises and Licenses
A franchise is a contract that gives a single firm the right to sell its goods within an exclusive market. A license is a government-issued right to operate a business.
Industrial Organizations
In rare cases, such as sports leagues, the government allows companies in an industry to restrict the number of firms in the market.

16. Price Discrimination
Price discrimination is the division of customers into groups based on how much they will pay for a good.
Although price discrimination is a feature of monopoly, it can be practiced by any company with market power. Market power is the ability to control prices and total market output.
Targeted discounts, like student discounts and manufacturers’ rebate offers, are one form of price discrimination.
Price discrimination requires some market power, distinct customer groups, and difficult resale.

17. Output Decisions
Even a monopolist faces a limited choice – it can choose to set either output or price, but not both.
Monopolists will try to maximize profits; therefore, compared with a perfectly competitive market, the monopolist produces fewer goods at a higher price.
A monopolist sets output at a point where marginal revenue is equal to marginal cost.
Setting a Price in a Monopoly
Market Price $11 $3
Price
9,000
Output
(in doses)
Marginal Cost
Demand
Marginal Revenue B C A

18. Section 2 Assessment 1. A monopoly is
(a) a market dominated by a single seller.
(b) a license that gives the inventor of a new product the exclusive right to sell it for a certain amount of time.
(c) an industry that runs best when one firm produces all the output.
(d) an industry where the government provides all the output.
2. Price discrimination is
(a) a factor that causes a producer’s average cost per unit to fall as output rises.
(b) the right to sell a good or service within an exclusive market.
(c) division of customers into groups based on how much they will pay for a good.
(d) the ability of a company to change prices and output like a monopolist.
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19. Section 2 Assessment 1. A monopoly is
(a) a market dominated by a single seller.
(b) a license that gives the inventor of a new product the exclusive right to sell it for a certain amount of time.
(c) an industry that runs best when one firm produces all the output.
(d) an industry where the government provides all the output.
2. Price discrimination is
(a) a factor that causes a producer’s average cost per unit to fall as output rises.
(b) the right to sell a good or service within an exclusive market.
(c) division of customers into groups based on how much they will pay for a good.
(d) the ability of a company to change prices and output like a monopolist.
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20. Let’s review from yesterday:
I will be asking a few questions that will cover THE SAME material on tomorrow’s quiz!

21. Four Conditions of Monopolistic Competition
In monopolistic competition, many companies compete in an open market to sell products which are similar, but not identical.
1. Many Firms
As a rule, monopolistically competitive markets are not marked by economies of scale or high start-up costs, allowing more firms.
2. Few Artificial Barriers to Entry
Firms in a monopolistically competitive market do not face high barriers to entry.
3. Slight Control over Price
Firms in a monopolistically competitive market have some freedom to raise prices because each firm's goods are a little different from everyone else's.
4. Differentiated Products
Firms have some control over their selling price because they can differentiate, or distinguish, their goods from other products in the market.

22. Non-price Competition
Nonprice competition is a way to attract customers through style, service, or location, but not a lower price.
1. Characteristics of Goods
The simplest way for a firm to distinguish its products is to offer a new size, color, shape, texture, or taste.
2. Location of Sale
A convenience store in the middle of the desert differentiates its product simply by selling it hundreds of miles away from the nearest competitor.
3. Service Level
Some sellers can charge higher prices because they offer customers a higher level of service.
4. Advertising Image
Firms also use advertising to create apparent differences between their own offerings and other products in the marketplace.

23. Prices, Profits, and Output
Prices will be higher than they would be in perfect competition, because firms have a small amount of power to raise prices.
Profits
While monopolistically competitive firms can earn profits in the short run, they have to work hard to keep their product distinct enough to stay ahead of their rivals.
Costs and Variety
Monopolistically competitive firms cannot produce at the lowest average price due to the number of firms in the market. They do, however, offer a wide array of goods and services to consumers.

24. Oligopoly
Oligopoly describes a market dominated by a few large, profitable firms. OPEC (Organization of the Petroluem Exporting Countries and Verizon are examples of oligopolies in the United States
Cartels
A cartel is an association by producers established to coordinate prices and production.
Collusion
Collusion is an agreement among members of an oligopoly to set prices and production levels.
Price- fixing is an agreement among firms to sell at the same or similar prices.

25. Oligopoly Examples
Many media industries today are essentially oligopolies. Six movie studios receive 90% of American film revenues.
The television industry is mostly an oligopoly of eight companies: The Walt Disney Company, CBS Corporation, Viacom, NBC Universal, Comcast, Hearst Corporation, Time Warner, and News Corporation.
Four major music companies receive 80% of recording revenues.
Four wireless providers (AT&T, Verizon Wireless, T-Mobile, Sprint) control 89% of the cellular telephone market.

26. Oligopoly Examples
Healthcare insurance in the United States consists of very few insurance companies controlling major market share in most states. For example, California's insured population of 20 million is the most competitive in the nation and 44% of that market is dominated by two insurance companies, Anthem and Kaiser Permanante.
Anheuser-Busch and MillerCoors control about 80% of the beer industry.[31]
Detroit's Big Three were leaders in the auto industry for many years. However globalization and demand for foreign imports have driven down sales sharply in recent years

27. Comparison of Market Structures
Markets can be grouped into four basic structures: perfect competition, monopolistic competition, oligopoly, and monopoly
Comparison of Market Structures
Number of firms
Variety of goods
Control over prices
Barriers to entry and exit
Examples
Perfect Competition
Many
None
Wheat,
shares of stock
Monopolistic Competition
Many
Some
Little
Low
Jeans,
books
Oligopoly
Two to four dominate
Some
High
Cars,
movie studios
Monopoly
One
None
Complete
Public water

28. Regulation and Deregulation
What market practices does the government regulate or ban to protect competition?
What is deregulation?

29. Government and Competition
Government policies keep firms from controlling the prices and supply of important goods. Antitrust laws are laws that encourage competition in the marketplace.
1. Regulating Business Practices
The government has the power to regulate business practices if these practices give too much power to a company that already has few competitors.
2. Breaking Up Monopolies
The government has used anti-trust legislation to break up existing monopolies, such as the Standard Oil Trust and AT&T.
3. Blocking Mergers
A merger is a combination of two or more companies into a single firm. The government can block mergers that would decrease competition.
4. Preserving Incentives
In 1997, new guidelines were introduced for proposed mergers, giving companies an opportunity to show that their merging benefits consumers.

30. Deregulation is the removal of some government controls over a market.
Deregulation is used to promote competition.
Many new competitors enter a market that has been deregulated. This is followed by an economically healthy weeding out of some firms from that market, which can be hard on workers in the short term.

31. Economies of Scale
The advantages of large scale production that result in lower unit (average) costs (cost per unit)
AC = TC / Q
Economies of scale – spreads total costs over a greater range of output

32. Economies of Scale
Internal – advantages that arise as a result of the growth of the firm
Technical
Commercial
Financial
Managerial
Risk Bearing

33. Economies of Scale
External economies of scale – the advantages firms can gain as a result of the growth of the industry normally associated with a particular area
Supply of skilled labor
Reputation
Local knowledge and skills
Infrastructure
Training facilities

34. Economies of Scale
Capital
Land
Labour
Output TC AC
Scale A 5 3 4
100
Scale B 10 6 8
300
Assume each unit of capital = $5, Land = $8 and Labor = $2
Calculate TC and then AC for the two different ‘scales’ (‘sizes’) of production facility
What happens and why?

35. Economies of Scale
Capital
Land
Labour
Output TC AC
Scale A 5 3 4
100 57
0.57
Scale B 10 6 8
300
114
0.38
Doubling the scale of production (a rise of 100%) has led to an increase in output of 200% - therefore cost of production
PER UNIT has fallen
Don’t get confused between Total Cost and Average Cost
Overall ‘costs’ will rise but unit costs can fall
Why?

36. Economies of Scale Internal: Technical
Specialisation – large organisations can employ specialised labour
Indivisibility of plant – machines can’t be broken down to do smaller jobs!
Principle of multiples – firms using more than one machine of different capacities - more efficient
Increased dimensions – bigger containers can reduce average cost

37. Economies of Scale Indivisibility of Plant:
Not viable to produce products like oil, chemicals on small scale – need large amounts of capital
Agriculture – machinery appropriate for large scale work – combines, etc.

38. Economies of Scale Principle of Multiples:
Some production processes need more than one machine
Different capacities
May need more than one machine to be fully efficient

39. Economies of Scale Principle of Multiples: e.g. Machine A Machine B
Machine C
Machine D
Capacity = 10 per hour
Capacity = 20 per hour
Capacity = 15 per hour
Capacity = 30 per hour
Cost = $100 per machine
Cost = $50 per machine
Cost = $150 per machine
Cost = $200
per machine
Company A = 1 of each machine, output per hour = 10
Total Cost = $500
AC = $50 per unit
Company B = 6 x A, 3 x B, 4 x C, 2 x D – output per hour = 60
Total Cost = $1750
AC = $29.16 per unit
The aim here is to show a simple example of how a production process involving a combination of machines operating at different capacities can have an effect on unit costs. The example could be a bottling plant with each machine doing a different task – filling the bottles, labelling, putting the tops on and packaging. Company A being small can only afford 1 of each machine, it is constrained by the capacity of the slowest machine – machine A, the rest of the machines are not being used to their full capacity and so are wasted for some of the time. They still however represent a cost to the firm but there is no return coming in.
The larger company can afford to buy multiples of each machine to ensure that they are all working to full capacity, the point to stress is that the total cost rises – obviously because there are more machines – by 2.5 times compared to company A but the output rises by 5 times the output level of company A hence AC falls. The point can be made that company A is at a significant cost disadvantage and hence this could affect its pricing structure and put it at a distinct competitive disadvantage.

40. Economies of Scale Increased Dimensions: e.g.
Transport container = Volume of 20m3
Total Cost: Construction, driver, fuel,
maintenance, insurance, road tax =
£600 per journey
AC = $30m3 2m 2m 5m
Total Cost = £1800 per journey
AC = $11.25m3
The explanation that accompanies this slide is fairly straight forward – The first container has a carrying capacity of 20 cubic metres. The cost of carrying the product involves the actual construction of the container/lorry etc, the cost of the maintenance, driver etc. This is assumed to be £600 per journey and as such gives an average cost of £30 per cubic metre.
Doubling the dimensions of the container increases the carrying capacity by 8 times. However, the cost of the construction, maintenance etc is not likely to rise by 8 times. The example shows cost having risen 2 times. As a result the cost per unit is now £11.25 per cubic metre! Again the point about the relative competitive advantage is worth highlighting. 4m 4m
10m
Transport Container 2 = Volume 160m3

41. Economies of Scale Commercial
Large firms can negotiate favourable prices as a result of buying in bulk
Large firms may have advantages in keeping prices higher because of their market power

42. Economies of Scale Financial
Large firms able to negotiate cheaper finance deals
Large firms able to be more flexible about finance – share options, rights issues, etc.
Large firms able to utilise skills of merchant banks to arrange finance

43. Economies of Scale
Managerial
Use of specialists – accountants, marketing, lawyers, production, human resources, etc.

44. Risk Bearing Economies of Scale Diversification
Markets across regions/countries
Product ranges

45. Economies of Scale
Minimum Efficient Scale – the point at which the increase in the scale of production yields no significant unit cost benefits
Minimum Efficient Plant Size – the point where increasing the scale of production of an individual plant within the industry yields no significant unit cost benefits

46. Economies of Scale
Unit Cost
Scale A
82p
Scale B
54p
LRAC
MES
Output

47. Diseconomies of Scale
The disadvantages of large scale production that can lead to increasing average costs
Problems of management
Maintaining effective communication
Co-ordinating activities – often across the globe!
De-motivation and alienation of staff
Divorce of ownership and control

48. Today we will review and create a flip foldable on Market Structures!
Get a gold and pink sheet of paper-
Answer the following questions for each market on their tabs (EOCT PG 65-66)
Fold the sheets over one another to create 4 tabs. (see my example on the board)
Label each tab with the following:
1.Perfect competition
2.Monopoly
3.Oligopoly
4.Monopolistic Competition
1.How many sellers are in this market? 2. Is there a variety of goods/services offered? 3. Are there barriers to enter this market? 4. Does the seller have control over the prices? 5. What is an example for this market? **Next, complete page 4-5 in your ISN to review for your quiz**