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Ch. 7: Market Structures
Section 1: Perfect Competition
• Competition balances free markets, but certain requirements need to be met for perfect competition to exist.
Perfect Condition
• Perfect competition requires the following…1. Many buyers and sellers participate2. Sellers offer identical products3. Buyers and sellers are well informed4. Sellers are able to enter and exit the market
freely/easily
1. Many Buyers and Sellers
• Having many producers and consumers creates choice, which brings down prices and improves products.
2. Identical Products
• In perfect competition, producers are selling identical products.
• Commodity- a product that is the same regardless of who produces it (gas, corn, milk)
3. Informed Buyers and Sellers
• Consumers and producers need to be informed about products and pricing to ensure competition.
• Internet has greatly advanced consumer information.
4. Easy Entry and Exit
• Producers need to be able to easily enter the market for there to be many sellers.
• How easy is it to start a business?
Barriers to Entry
• Barrier to entry: anything that causes difficulty to businesses trying to enter a market.
• Excessive barriers to entry reduce the number of producers.– Start-up costs– Legal/certification requirements
Barriers to Entry
• With your partner…– Consider to barriers to entry for your business.– List all start-up costs and legal requirements that
you would need to overcome to create your business.
Barriers to Entry
• High start-up costs and legal requirements make it difficult to enter the market.
• America is ranked highly on the list of “ease in starting a business” list.– Limited number of legal “hoops”.
Section 2: Monopoly
• Monopolization eliminates competition entirely.
Monopoly• A monopoly is a market that only has one
supplier/producer. • Eliminates competition.
Monopoly examples
• With a partner, think of examples of markets with only one provider of the good/service.
Microsoft?
How they form
• Economies of scale: average cost per unit falls as production increases.
• This makes big businesses more cost effective- enabling them to cut costs and absorb competitors.
John Rockefeller: Standard Oil
• Practiced horizontal consolidation.
Andrew Carnegie: Carnegie Steel
• Practiced vertical consolidation.
Natural Monopoly
• An industry that operates most efficiently with just one provider.– Utilities: water, electric, natural gas – Roads
Government Monopoly
• A monopoly created by the government.– Patents– Contracts
Patents• A patent is a license given to an inventor that gives
them exclusive rights to sell their product.• Good for a limited period of time.
Funny inventions
Contracts and Franchising
• Government often picks firms to make contracts with.
• Company “X” is chosen to install and stock all school vending machines.
Section 3: Monopolistic Competition
• Most markets are neither in perfect competition, nor monopolies, but somewhere in between.
Monopolistic Competition
• Monopolistic competition is when many companies compete to sell products that are similar, but not identical.
Monopolistic Competition vs
Perfect Competition• Both have many competing firms/producers• Both have few barriers to entry• However…– Perfect Competition is a market with identical
products (commodities). – Monopolistic Competition is a market with
differentiated products (most consumer goods).
Nonprice Competition• Monopolistic competitors can compete on factors
other than price…– Physical characteristics – Location– Service level– Advertising, image, or status (popularity)
Oligopoly• Oligopoly is a market with only a few firms providing goods.• Occurs in markets with high barriers to entry.
– Think: industries that would be realistically impossible for you to enter as a producer.
Collusion• Collusion is when members of oligopolies agree to
set prices and production levels.• Collusion is illegal, because the effects are the same
as a monopoly- elimination of competition.
Cartels
• Cartels are organizations that form to coordinate prices and production.
• Also illegal, and are often associated with the black market (drug cartel)
Section 4: Regulation and Deregulation
• Government attempts to balance two competing interests…– Open, accessible markets for producers– Protection for consumers
Regulation vs. Deregulation
• Too much regulation can make it difficult for producers to enter markets (raises barriers to entry)
• Too little regulation can create monopolies and predatory business practices that end up hurting consumers.
Antitrust Laws
• During the Industrial Revolution, many trusts were formed.• Trusts are like cartels and result in monopolization (Standard
Oil Trust- Rockefeller) • Government eventually broke up these trusts.
Mergers
• Mergers are when two or more companies combine into one.
• Mergers are tightly regulated to avoid monopolization.
Deregulation
• During the 1970s and 1990s, Congress passed numerous laws to deregulate, citing increased inefficiencies as a result of the laws.
Credit Crisis 2007-Present
• Many cite deregulation of Wall Street investment banks as a cause of the banking collapse in 2007.
• Lending was loosely regulated, and banks were able to knowingly make faulty loans.