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Market Structures and Market Failures
What happens when markets do not work perfectly?
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Characteristics That Define Market Structure
Number of Producers- the number of producers in a given market Similarity of Products- the degree to which products in a market are similar Ease of Entry- how easy it is to start a new business and compete with established businesses Control over Price- how one can influence price by increasing or decreasing price. (Market Control)
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Characteristics of “Perfect Competition”
Many Producers and Consumers- large numbers promote competition Identical Products- Commodity Products that are exactly the same no matter who produces it. Easy Entry into market- few restrictions No Control over Prices- No market power
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WIO: Perfect Competition
Make a simple sketch of a consumer and a producer. Add a thought bubble for each person that explains one of the benefits of perfect competition.
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What is a Monopoly, and Why Are Some Legal.
Monopoly- Single producer of a product that has no close substitutes.
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Characteristics of Monopolies
One Producer- No competition Unique Product- Only product of its kind, no good substitutes. High barriers to entry- limit or prevent others from entering market. (Main factor to why they exist) Substantial Price Control-Great Market Power, no fear of undercutting.
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Legal Monopolies Resource Monopolies- control of a key natural resource, other firms have no access. Government-created monopolies- created when in public interest Natural Monopolies-when a firm can provide a good or service more efficiently than 2 or more companies.
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Why Monopolies are bad for Consumers
Consumers may pay more than they would in a competitive market Monopolies have less incentive to innovate or to satisfy consumers. Strong possibility of lesser product quality and fewer product choices.
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Characteristics of an Oligopoly
Oligopoly- a market or an industry dominated by just a few firms that produce similar or identical products. Few Producers Similar Products High barriers to entry Some control over prices
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Characteristics of Monopolistic Competition
Monopolistic Competition- Large number of producers providing goods that are similar but varied. Many Producers Differentiated Products Few barriers to entry Some control over prices.
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WIO: Comparison Chart Good Descriptions! (May use book to help out)
Market Structures Number of Producers Products Ease of Entry Price Control Perfect Competition Monopolistic Oligopoly Monopoly Good Descriptions! (May use book to help out)
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Market Failures: Externalities and Public Goods
Market Failure: economy fails to use all its resources effectively and efficiently Externality: Side effect of production or consumption that has consequences for people other than consumer or producer (examples: factory pollution, Corn Syrup company odor, etc.) Negative externality: cost that falls on someone other than producer or consumer
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Market Failures: Externalities and Public Goods
Positive Externality: benefit that falls on someone other than the producer or consumer (ex: neighbor’s flower bed, company creating a less pollutant vehicle, getting a college education) Technology spillover: technical knowledge from one company spreads to another company or individual (ex: more efficient car = more pollution control
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Problems of Private and Public Goods:
Public goods: goods and services that are not provided by the market system because of the difficulty of getting people who use them to pay for their use (examples: fire and police, national defense, public parks) Private goods: goods and services that are sold in markets
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Private vs. Public goods
Private goods are excludable, which means if you don’t pay for the good, you don’t get to use it (example: buying an apple) Public goods are nonexcludable, which means everyone can use it (example: streetlight)
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Private vs. Public goods
Private goods are a rival in consumption: good can’t be consumed by more than one person at the same time (eating an apple) Public goods are nonrival in consumptions, meaning more than one can enjoy at same time (streetlight)
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