1. Chapter 7
Market Structures

2. Perfect Competition
A theoretically ideal situation that is used to evaluate other market structures
Five major conditions characterize perfectly competitive markets.
there are a large number of buyers and sellers.
buyers and sellers deal in identical products.
each buyer and seller acts independently.
buyers and sellers are reasonably well-informed about products and prices.
buyers and sellers are free to enter into, conduct, or get out of business.

3. Perfect Competition
Each individual firm is too small to influence price.
Market supply and market demand set the equilibrium price.
This price becomes a horizontal demand curve facing each perfectly competitive firm

4. Perfect Competition

5. Perfect Competition When the firm wants to maximize its profits
It finds the level of output where marginal cost equals marginal revenue.

6. Perfectly Competition
For example, the firm’s marginal cost (MC) for producing the 110th unit of output was $4.50.
Output will increase until Marginal cost equals marginal revenue

7. Perfect Competition Few, if any, perfectly competitive markets exist
Important because economists use it to evaluate other market structures
Imperfect competition is a market structure that lacks one or more of the necessary conditions.
monopolistic competition, oligopoly, and monopoly

8. Monopolistic Competition
all the conditions of perfect competition except for identical products.
By making its product a little different they try to attract more customers and monopolize a small portion of the market.
utilizes product differentiation –real or imagined differences between competing products in the same industry.

9. Monopolistic Competition
Businesses want to make consumers aware of product differences.
Nonprice competition –the use of advertising, giveaways, or other promotional campaigns to convince buyers that the product is somehow better than another brand
usually advertise or promote heavily to make their products seem different from everyone else’s

10. Monopolistic Competition
similar products generally sell within a narrow price range.
The profit maximization behavior is no different from that of other firms
The possibility of profits draws new firms
In time, becomes fairly stable with no great profits or losses.

11. Oligopoly a few very large sellers dominate the industry
The products may be
differentiated– as in the auto industry,
standardized–as in the steel industry
The exact number of firms in the industry is not important
the ability of any single firm to cause a change in output, sales, and prices is important

12. Oligopoly
Oligopoly is further from perfect competition than is monopolistic competition.
many markets are already oligopolistic
many more are becoming so
Oligopolists are even popping up on the Internet

13. Oligopoly Interdependent Behavior Because oligopolists are so large
whenever one firm acts the other firms usually follow.
Each knows that the other firms in the industry have power and influence.
Sometimes this takes the form of collusion, an agreement to set prices or cooperate.

14. Oligopoly One form of collusion is price-fixing
agreeing to charge the same or similar prices for a product
these prices are higher than those determined under competition

15. Oligopoly Pricing Behavior
When one firm lowers prices it can lead to a price war
A series of price cuts that result in unusually low prices.
usually short but intense
provide welcome price breaks for consumers
Raising prices is risky
unless the firm knows its rivals will follow.

16. Oligopoly
The product’s final price is likely to be higher than it would be under monopolistic competition
And much higher than it would be under perfect competition.
Even when oligopolists do not collude
they seldom protest price hikes by their rivals.

17. Monopoly
At the opposite end of the spectrum from perfect competition is the monopoly
a market structure with only one seller of a particular product
This situation is an extreme case.
we have so few monopolies because Americans dislike and try to outlaw them

18. Monopoly
Sometimes the nature of a good or service would be served best by a monopoly.
Natural monopolies can provide services more cheaply as monopolies than could several competing firms
a larger firm can often use its personnel, equipment, and plant more efficiently

19. Monopoly Sometimes a business has a monopoly because of its location.
A drugstore in a town that is too small to support two stores becomes a geographic monopoly
a monopoly based on the absence of other sellers in a certain geographic area.

20. Monopoly
A technological monopoly is based on control of a manufacturing method, process, or other scientific
The government may grant a patent
an exclusive right to manufacture, use, or sell any invention for a specific period.
Art and literary works are protected through a copyright

21. Monopolies
A government monopoly –a monopoly the government owns and operates
involve products or services that private industry cannot adequately provide
Water utilities

22. Monopoly and Profit Maximization
First, the monopolist is very much larger than the perfect competitor
Second, this size, and lack of competition, allows the monopolist to behave as a price maker
there is no equilibrium price
the monopolist determines the price
will equate its marginal revenue with its marginal cost
the monopolist will charge more for its and then limit the quantity for sale in the market.

23. Market Failure Markets sometimes fail
A competitive economy works best when four conditions are met.
Adequate competition must exist in all markets.
Buyers and sellers must be reasonably well-informed.
Resources must be free to move from one industry to another.
Prices must reasonably reflect the costs of production

24. Inadequate Competition
Over time, mergers and acquisitions have resulted in larger and fewer firms
The decrease in competition has several consequences.

25. Inefficient Resource Allocation
why would a firm with few or no competitors have the incentive to use resources carefully?
resources that could be put to other, more productive uses if they were available.
This is one of the reasons that public utilities such as electricity are regulated by the government

26. Higher Prices and Reduced Output
Monopolies can use its position to prevent competition and restrict production
This situation brings about artificial shortages that cause higher prices

27. Inadequate Information
If resources are to be allocated efficiently, everyone must have adequate information about market conditions
Information about conditions in many markets is needed
If this knowledge is difficult to obtain, then it is an example of a market failure

28. Resource Immobility One of the more difficult problems in any economy
This means that resources do not move to markets where returns are the highest
Resource mobility is difficult to accomplish in the real world.

29. Externalities
Many activities generate some kind of unintended side effect
effects a third party not involved in the activity that caused it.
Can be a positive or negative effect
Externalities are classified as market failures
their costs/benefits are not reflected in the market prices

30. Public Goods
Another form of market failure shows up in the need for public goods
A Public good is a product that are collectively consumed by everyone
use by one individual does not diminish the satisfaction or value available to others.
The market does not supply enough of these items

31. Public Goods
a market economy produces only items that can be withheld if people refuse to pay for them
private markets cannot efficiently produce them and will therefore produce other things
the market is very successful in satisfying individual wants and needs,
it fails to satisfy collective wants and needs.
the government usually has to provide them

32. Antitrust Legislation
The United States has passed laws to restrict monopolies, combinations, and trusts
A trust –legally formed combinations of corporations or companies
this is designed to prevent market failures due to inadequate competition
1890 passed the Sherman Antitrust Act
“to protect trade and commerce against unlawful restraint and monopoly.”

33. Antitrust Legislation
The Sherman Act was the country’s first significant law against monopolies
broad foundations for maintaining competition
The act was not specific enough to stop many practices
1914 passed the Clayton Antitrust Act
Gave the government greater power against monopolies

34. Antitrust Legislation
Clayton Antitrust Act
this act outlawed price discrimination
The Federal Trade Commission Act was passed to enforce the Clayton Antitrust Act
Set up the Federal Trade Commission (FTC)
Gave the authority to issue cease and desist orders

35. Antitrust Legislation

36. Government Regulation
Local and state governments regulate many monopolies
such as cable television companies, water and electric utilities, and even telephone companies
A government agency usually approves prices for their services
In the case of a natural monopoly -- regulate activities so that it cannot take advantage of the consumer

37. Public Disclosure
The purpose is to provide the market with enough data
One of the more potent weapons available to the government
requirement that businesses reveal information to the public
The degree of disclosure is more extensive than most people realize

38. Public Disclosure
there are “truth-in-advertising” laws that prevent sellers from making false claims about their products
The government has worked indirectly to improve information available to consumers

39. Vocabulary Imperfect competition product differentiation Trust
government monopoly
Oligopoly
Monopoly
Market Failure
Externality
technological monopoly
geographic monopoly
Natural monopolies
price-fixing
Collusion
Nonprice competition
Public goods