1. Market Structures How much “market power” does a business have?

2. <============================================  Perfect Competition MonopolyOligopoly Monopolistic Competition Most Competitive Least Competitive Market Structure Continuum The type of market structure determines the “pricing power” of a business (ability to raise prices) 5 market characteristics determine type of market

3. #3: Ease of Entry/Exit into the Industry #1: Number of Firms in that market Restaurants Auto Companies Operating systems #2: Type of Product Sold #5: Degree of Price Control What Determines the Type of Market Structure? #4: Amount of Information Available Price Taker: firm has little/no control over price Price Setter: firm has some control over price

4. Perfect Competition Does the Free Market really work this way?

5. PERFECT COMPETITION Monopolistic Competition OligopolyMonopoly Perfect Competition is only a theory/model It does not exist in the “real” world It would be Adam Smith’s dream! Most competitive Least competitive Perfect Competition Market Structure

6. Perfect Competition Characteristics Many small Firms Homogenous products Complete freedom to enter or exit industry Perfect information Price Taker: –No price control—sell at Market Price

7. Redwood High School Example

8. Concept of “Zero Economic Profit” In long run profits are pushed to zero economic profit –This does not mean you earn no money Example (farmer): Revenue Expenses $71,000 $10,000 (seeds) $ 4,000 (fertilizer) $50,000 (“fair wage”— equivalent of a salary) $ 7,000 (water) $71,000

9. Perfect Competition in Action Markets of perfect competition are naturally “self regulating” Prices are pushed lower until firms reach zero economic profit Only most efficient businesses will survive

10. Worksheet

11. T-SHIRTSBICYCLES FOOD The Self-Regulation of Perfect Competition S1S1 D1D1 S1S1 D1D1 S1S1 D1D1 ------- P1P1 P1P1 P1P1

12. Perfect Competition Equilibrium Price Qty Wheat D1D1 S1S1 -------------- ------------- $10 Q1Q1 E1E1 Price Qty A small firm can sell all of their production at the market price (price taker) $10 Q1Q1 Entire IndustryIndividual Firm D1D1 Wheat