1. Chapter 7

2. Perfect Competition (theoretical)
Large # of buyers and sellers (B/S) exchange identical products under five conditions:
There should be a large # of B/S
The products should be identical

3. Perfect Competition, continued
3. B/S should act independently
4. B/S should be well-informed
5. B/S should be free to enter, conduct, or get out of business

4. Perfect v. Imperfect Competition
Under perfect competition, supply and demand set the equilibrium price, and each firm sets a level of output that will maximize its profits at that price.
Imperfect competition refers to market structures that lack one or more of the five conditions of perfect competition

5. Monopolistic Competition
Meets all the requirements of perfect competition minus the identical products
NONPRICE COMPETITION: public relations, giveaways, advertising, promotional campaigns
Use product differentiation-real or imagined. Ex?
How do cell phone, fragrance, or junk food companies differentiate their products?

7. Oligopoly Few very large sellers dominate the industry. Ex?
Further away from perfect competition than monopolistic competition
Act interdependently by lowering prices soon after the first seller announces the cut. **Prefer non-price competition
May all agree formally to set prices (collusion), which is illegal

8. Two forms of Collusion
1. Price-fixing-an agreement to set a price that is often above market price
2. Dividing the market for guaranteed sales
-price wars-Pushing prices lower than the cost of production (short run)
Final prices are likely to be higher than under Mon-Comps and much higher under Per-Comp

9. Monopoly Only one seller in a particular market. Ex?
Four types: Natural, Geographical, Technological, Government
The monopolist is larger than a perfect competitor, allowing it to be the price maker versus the price taker.

10. Natural Monopoly
Single firm or business produces a product or provides a service because it minimizes the overall costs (public utilities)

11. Geographic Monopoly
The location cannot support two or more such business (small town drugstore)

12. Technological Monopoly
Producer has exclusive rights through patents or copyrights to produce or sell a particular product

13. Government Monopoly
Government provides products or services that private industry cannot adequately provide (uranium processing)

14. Market Failures and Government Response14

15. Market Failures
Inadequate Competition Decreases in competition can lead to several consequences that create market failures
Inefficient resource allocation
Where is the incentive to use resources carefully?
Higher prices and Reduced Output
Artificial shortages cause higher prices. 15

16. Both sides of the Market
Failures on the demand side are harder to correct than failures on the supply side.
Economic and Political Power
Many firms use $$ to further the political careers of relatives and friends.
Revolving Door… 16

17. Inadequate Information
To redistribute product and $$ where it needs to be, everyone must have adequate, reliable, easy-to-find information…
otherwise the market fails!! 17

18. Resource Immobility
The FOP cannot move to a new market where returns are higher = market failure
Ex?
Steel mills, auto assembly plants, military bases 18

19. Externalities Costs (-) or benefits (+) of production or consumption of a good spill over onto non-producers or consumers.
Positive or Negative?
New airport expansion
Both. Why?
New sports stadium
The costs and benefits are not reflected in the market prices that buyers and sellers pay for the original product. Thus, it is a market failure 19

20. Public Good
While the market is successful in satisfying individual wants and needs, it may fail to provide for the collective.
…so the government has to provide
these services. 20

21. Where Does Government Fit In?
Antitrust Legislation
Prevent market failures due to inadequate competition
Remember Sherman (1890) and Clayton (1914) Anti-trust Acts? 21

22. Government Regulation22

23. Internalizing Externalities
A firm causes pollution  The Gov taxes firms
1st: As firm’s production costs ↑, supply ↓
2nd: Price ↑ = Demand ↓
Taxes are used to clean pollution
Thus, polluting firms and their customers, rather than innocent third parties, are forced to pay for the cost of the pollution clean-up

24. Public Disclosure Direct Indirect
Provide the market with data to prevent market failures due to inadequate information
Businesses are required by federal law, to reveal information to the public
“Truth in Advertising” laws prevent sellers from making false claims about products.
Includes gov’t support of the Internet and availability of government documents on Web sites.
Businesses post information about their own activities on their company websites. 24

26. Modified Free Enterprise
Government intervention keeps ‘em honest by:
Promoting competition
Preventing monopolies
Regulating industry
Fulfilling the need for public goods
U.S. economy is mixture of different market structures, business organizations, and government regulation 26