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CHAPTER 7: MARKET STRUCTURESS1: Perfect Competition
S2: Monopoly
S3: Monopolistic Competition and Oligopoly
S4: Regulation and Deregulation
S1: MARKET STRUCTURES
“What are the characteristics of Perfect competition?”
Objectives 4 conditions of a perfectly competitive market 2 common barriers that prevent firms from entry Prices/output in perfectly competitive market
Key terms http://www.pearsonsuccessnet.com/snpapp/iText/products/0-13-3
69833-5/Flash/Ch07/Econ_OnlineLectureNotes_ch7_s1.swf
INTRODUCTION
Characteristics of perfect competition? Many buyers/sellers Identical products Informed buyers/sellers Free market entry/exit
PERFECT COMPETITION
Simplest market structure Also called pure competition
Perfectly Competitive Market: Large # of firms Firms producing same products Assumes market is in equilibrium Assumes firms sell same product at same price
CONDITIONS OF PERFECT COMPETITION
Only few perfectly competitive markets Tough b/c markets must meet 4 strict
conditions Many buyers/sellers participating in market
No 1 person/firm can be too powerful so to influence total market qty. or price
Sellers offering identical products No difference in products sold: gas, paper, sugar.
Buyers/sellers well-informed about products Market provides plenty of info to buyers. Understand
features, price, and other info about product Sellers are able to enter/exit market freely
Very easy to enter/exit a perfect market Entrance when popular; exit when demand decreases
BARRIERS TO ENTRY
Barriers lead to imperfect competition Barriers can include:
Start-up costs: When start-up costs are high it is more difficult for new
firms to enter market Markets w/high start-up costs are less likely to be
perfectly competitive. Technology
Markets that require high degree of technical knowledge can be difficult to enter into w/out preparation and stu
PRICE AND OUTPUT
Perfectly competitive markets are efficient and competition keeps both prices/production costs low. Prices (in PC Market) correctly represent the
opportunity costs of each product Also provide the lowest sustainable prices
possible. Output
B/c of PC Market, no supplier can greatly influence prices. Producers make their decisions based on most efficient use of resources.
LESSON CLOSING
Pearsson Resources Visual Glossary Action Graph: Market Equilibrium
“Exit Pass” Critical Thinking; 8-10
Also have answers for tomorrow
Workbook Work Chapter Work pgs. 57 and 131 Identifying Perfect Competition worksheet
CRITICAL THINKING
1. Which markets are close to Perfect competition1. Paper clips and white socks
2. Commodities?1. Products same regardless of producer
3. Why must PC markets always deal in commodities?1. Products must be identical, buyers will not pay more for
one producers good
4. What would happen today?1. Buyers would make decisions based on differences b/t
products
5. Barriers to entry1. Factors that make it difficult to enter a market
6. 2 other specific examples1. Difficulty in finding raw materials, difficulty in finding
workers
7.2: MARKET STRUCTURES
“Characteristics of a monopoly?” Objectives
Characteristics/examples of a monopoly How monopolies, including govt., are formed How firm w/monopoly makes output decisions Why monopolists sometimes practice price
discriminations Key Terms
http://www.pearsonsuccessnet.com/snpapp/iText/products/0-13-369833-5/Flash/Ch07/Econ_OnlineLectureNotes_ch7_s2.swf
INTRODUCTION
What are characteristics of a Monopoly? Single Seller Many barriers
to entry for new firm
No variety of goods
Complete control of price
CHARACTERISTICS OF A MONOPOLY
Characteristics Single seller in market Many barriers to entry Supply unique product w/no close substitute
Having market cornered Change high prices Quantity of goods lower than in competitive
market
FORMING A MONOPOLY
Economies of Scale Different market conditions create different types of
economies Some monopolies enjoy this
Characteristics that cause a producers av. Cost to drop as production rises
Natural Monopolies Market that runs most efficiently when one large firm
provides output Public water is an example
If it wasn’t a natural we would use too much, and be inefficient
Technology can destroy a natural monopoly. Read pg.166 Can cut fixed costs to make small companies compete
w/large firms
FORMING A MONOPOLY
Govt. actions that lead to monopolies Issuing a patent: gives exclusive rights to sell
good/service Granting a franchise: gives single firm right to
sell its goods w/in an exclusive market Issuing a license- allows firms to operate a
business, especially where scarce resources are involved
Restricting number of firms in a market
OUTPUT DECISIONS:
Monopolists Dilemma: Choose PRICE or OUTPUT They think BIG PICTURE to maximize profits
Produce fewer goods @ higher prices Can be viewed in terms of demand
Buyers will demand more of a good @ lower prices BUT the more a monopolist produces, the less they will
receive in profits.
Falling Marginal Revenue Key difference in PCs and Monopolies
PCs marg. Rev.= price, each firm receives same price no matter production
Not true for monopolies
OUTPUT DECISIONS:
Setting a Price Marginal revenue is lower than market price in
monopolies Setting a Price Action Graph Question: Where does a monopolist usually
set output and price compared to PC market? Monopolist sets output lower and price higher
than seller in a PC market
PRICE DISCRIMINATION
Many cases the monopolist charges the same price to all customers
Some instances they don’t: Called Price Discrimination Idea that each costumer has a maximum price that
he/she will pay for a good Targeted Discounts: targeting particular groups
Discounted airline fares Senior citizens/students Children promotion
Limits: must me 3 conditions Firms must have market power Customers divided into distinct groups Buys must not be in a position in which they can easily
resell good/service.
LESSON CLOSING
Pearsson Success Economies of scale graph Setting a price action Graph Demand schedule for Breathedeep Graph Case Study: Book/Video Monopoly: Chart Skills
“Exit Pass” Critical Thinking 8-11
BELL WORKFinish Critical Thinking: Watch Competition Video
Workbook Pg. 58, 138
“Perfect Competition”
CH. 7.3
“What are the characteristics of monopolistic competition and oligopoly?”
Objectives Characteristics/Examples of monopolistic
competition How Firms compete w/out lowering prices How firms in monopolistic competitive market
set output Characteristics/examples of an oligopoly
Key Terms http://
www.pearsonsuccessnet.com/snpapp/iText/products/0-13-369833-5/Flash/Ch07/Econ_OnlineLectureNotes_ch7_s3.swf
INTRODUCTION: CHARACTERISTICS OF MONOPOLISTIC COMPETITIONS AND OLIGOPOLY
Many firms in Market
Some variety of goods
Minimal barriers to entry
Little control over prices
Few firms in the market
Some Variety of Goods
Many Barriers to Entry
Some control over prices
Monopolistic Oligopoly
MONOPOLISTIC COMPETITION
Many companies compete in an open market to sell similar, but not identical, products
Examples Specialty Shops (bagel, coffee, candy) Gas Stations Retail Stores Jean Stores
Conditions Many Firms: Low start-up costs allows large entry Few Barriers: Easy for new firms Little control over Price: Firms can’t raise prices much
for fear of costumers going elsewhere Differentiated Products
Allows a firm to profit from the differences b.t their product and competitor’s
NONPRICE COMPETITION
NonPrice competitions can be another way firms differentiate their products Physical Characteristics
Size, color, shape, texture can all differentiate Location
Convenience of location is huge! Advertising, Image, or Status
Look around…. Why do some people buy one T-shirt over another? They both cover your bodies?
PRICES
Prices, Output, and profits under monopolistic competition structures look similar to PC Market
Prices Prices are higher than PC market but demand
curve is more Elastic b/c customers can choose substitutes
Output Elasticity in MC firms causes total output to fall
between a monopoly and PC market Profits
Can earn just enough to cover all of costs Short term profits, but competition makes profit
hard to maintain
OLIGOPOLY
Market dominated by few, profitable firms Barriers to Entry
Can be technological or created by system of govt. licenses or patents Economies of scale can also lead to oligopoly
3 Practices that concern Govt. from Oligopolies Price Leadership: can lead to price wars Collusion: Leads to price fixing and is illegal
Agreement among oligopoly leaders to set prices/output
Cartels: Organization of producers that agree to fix production/prices (OPEC) (See 178) Also illegal in U.S. Survive if every member sticks to plan
LESSON CLOSING
Virtual Economics Activity w/partner Maintaining competition Due Next Friday
Go in as Project Grade
Workbook pgs 59, 145
CHAPTER 7.4
“When does the govt. regulate competition?” Objectives
How firms might try to increase their market 3 market practices the govt. regulates or bans to
protect competition What is regulation, and its effects on some
industries Key Terms
http://www.pearsonsuccessnet.com/snpapp/iText/products/0-13-369833-5/Flash/Ch07/Econ_OnlineLectureNotes_ch7_s4.swf
INTRODUCTION
When does the govt. regulate competition? Govt. sometimes takes steps to promote
competition to promote lower prices Done through….
Anti-trust laws Approving/not approving mergers Deregulation
INCREASING MARKET POWER
Monopolies/Oligopolies are viewed as bad for consumers and economy Firms try and merge
with one another and drop prices in order to gain more market power and push others out
GOVT. AND COMPETITION
Fed. Govt. has policies know as anti-trust laws Meant to keep firms from gaining too much
market power FTC and DOJs Antitrust Division watch firms to
make sure they only act fairly History of Antitrust Policy
Despite laws, companies have used other strategies to gain market control
3 GOVT. ACTIONS
Regulating Businesses Govt. can regulate companies that try to get
around antitrust laws 1997, DOJ accuses Microsoft of using near-
monopoly over the operating system market to try to take control of the browser market
Judge ruled against Microsoft. MSFT could not force computer manufacturers to
provide only MSFT software on new computers
3 GOVT. ACTIONS CONT’D
Blocking Mergers Govt. can block mergers to prevent rise of
monopolies Also checks in on past mergers to make sure
they are not leading to monopolies Govt. looks to predict effects of merger before
approval
Corporate Mergers Can benefit consumers too
Lower average prices which leads to: Lower prices More reliable products/services More efficient industry
DEREGULATION
Govt. no longer decides what role each company can play in market and how much it can charge
Some regulation had been seen to reduce competition, leading to deregulation
Examples of Deregulation Airlines Trucking Banking Natural Gas RR Television Broadcasting
JUDGING DEREGULATION
How does it encourage competition? Many new firms usually enter right away Often weeds out weaker players in long-run
Example When airlines deregulated, many new firms
entered market, but some eventually failed Competition increased among airlines and prices
went down