1. Lead off 2/23 Do you prefer Pepsi or Coca Cola? Why?

2. Markets: Structure, Failure, and the Role of the Government Chapter 7

3. I. Market Structure How businesses relate to each other Official definition: the nature and degree of competition among firms in the same industry A.Perfect Competition B.Monopolistic Competition C.Oligopoly D.Monopoly

4. I. Market Structure A.Perfect Competition 1.Conditions Large number of buyers and sellers Identical products Independent buyers and sellers Well informed buyers and sellers Easy entrance into market 2.Profit Maximization Price is set by supply and demand (producer has to take the price that is established) Firm should produce as much product as possible at the lowest price (until marginal cost=marginal revenue) 3.Theory vs. Reality Perfect competition does not really exist (maybe a roadside produce sale) Gives a baseline for comparison B.Monopolistic Competition C.Oligopoly D.Monopoly

5. I. Market Structure A.Perfect Competition B.Monopolistic Competition (ex: clothing, software) 1.Characteristics Many companies Sellers try to gain a larger share of the market from their competition Product differentiation – sellers try to make their products more attractive (real or perceived) Use of advertising Easy to enter market Compete with a narrow range of price differentiation 2.Profit Maximization Convince consumers to pay higher price (differentiation or advertising) Have a low enough price to draw consumers away from competition C.Oligopoly D.Monopoly

6. I. Market Structure A.Perfect Competition B.Monopolistic Competition C.Oligopoly (ex: soft drinks, major airlines) 1.Characteristics A few large sellers Difficult to enter market Firms follow each other in pricing (although not allowed to cooperate) Compete only with advertising and product differentiation 2.Profit maximization Firms try to convince consumers their product is better D.Monopoly

7. I. Market Structure A.Perfect Competition B.Monopolistic Competition C.Oligopoly D.Monopoly 1.Types Natural – cost to provide service makes it impractical for more than one firm to provide a good or service (ex: electricity) Geographic – only one firm exists in an area (ex: Country Mart) Technological – only one firm has the capability to provide (ex: pharmaceutical companies) Government - the government is the sole provider of a good or service (ex: sewage/water) Illegal – businesses working together (collusion) 2.Profit maximization – business can charge whatever price they want! (To a point)

8. Lead off 2/24 Read “Cover Story” and the first paragraph of text on page 173 1.What type of writing is this article? (Make Mrs. Bland proud!) 2.Do you think what is proposed is a good idea? 3.What other situations can you think of where customers at a business cause negative effects on others?

9. II. Market Failure A.Defining market failure 1.Conditions for a functioning free enterprise economy Adequate competition Adequate information Resource mobility Price and cost are closely related 2.Failure = when any of the conditions are not met

10. II. Market Failure B.Reasons for market failure 1.Inadequate competition Resources are wasted- don’t have to compete for resources Prices are too high - don’t have to compete for customers Production declines Political corruption - can leverage economic power over the government 2.Inadequate information - since economics is about choices and trade-off, lack of information will lead to bad choices 3.Resource immobility - if people and resources can’t or wont move to where they are needed they cannot be productive 4.Externalities - 5.Need for public goods -

11. II. Market Failure B.Reasons for market failure 1.Inadequate competition- 2.Inadequate- 3.Resource immobility - 4.Externalities - consequences of economic actions felt by those not directly involved Can be positive or negative The problem: market economy works when profits are tied to good decision making. When that connection is lost, people cannot make good decisions about how to employ resources 5.Need for public goods - products used by everyone in a society A market economy will not produce such things on its own The government must provide those things instead

12. III. The Role of Government *There are things the government does to limit market failure A.Protector of competition 1.Sherman Anti-trust Act - outlawed many monopolies 2.Clayton Anti-trust Act - strengthened the Sherman Act and made price discrimination illegal 3.Federal Trade Commission Act - made price fixing among firms illegal B.Regulator C. Informer

13. III. The Role of Government *There are things the government does to limit market failure A.Protector of competition B.Regulator 1.Makes rules for natural monopolies 2.Agencies that regulate (make rules about) Food safety Stocks Discrimination Air travel Pollution Work place safety 3. Internalizing externalities - ex: tax on business that pollutes Supply decreases (less pollution) Price increases (customers suffer) Money used to clean up pollution (innocent party helped) C. Informer

14. III. The Role of Government *There are things the government does to limit market failure A.Protector of competition B.Regulator C. Informer 1. Publicly traded companies must disclose financial information 2. government gathers and publishes economic information (unemployment rate, etc.)