Chapter 7 Section 1

Perfect Competition

Chapter 7 Section 1

Perfect Competition

Key Terms and DefinitionsKey Terms and Definitions

Perfect competition- a market structure in which a large number of firms all produce the same product.

Commodity- a product that is the same no matter who produces it, such as petroleum, notebook paper, or milk.

Barrier to entry- any factor that makes it difficult for a new firm to enter a market.

Imperfect competition- a market structure that does not meet the conditions of perfect competition.

Start-up cost- the expenses a firm must pay

before it can begin to produce and sell goods.

Perfect competition- a market structure in which a large number of firms all produce the same product.

Commodity- a product that is the same no matter who produces it, such as petroleum, notebook paper, or milk.

Barrier to entry- any factor that makes it difficult for a new firm to enter a market.

Imperfect competition- a market structure that does not meet the conditions of perfect competition.

Start-up cost- the expenses a firm must pay

before it can begin to produce and sell goods.

Perfect CompetitionPerfect Competition1) Need to have many Buyers & Sellers1) Need to have many Buyers & Sellers

2) Sellers offer identical products

3) Buyers & Sellers are

well informed about products

4) Sellers are able to enter and exit the market freely

Imperfect CompetitionImperfect CompetitionBarriers to entry- are factors that make it difficult for new firms to enter a market.

1) Start-up Costs- The expenses that a new business must pay before the first product reaches the customer.

What sort of costs are there?

2)Technology or Knowledge: Do you understand the process by which your goods or services are produced?

CommodityCommodity

• A product that is the same no matter who produces it, such as petroleum, notebook paper, produce, or perhaps milk.

• Understand that there are, for instance, different kinds of milk, but generally we buy milk not by brand but by price.

• A product that is the same no matter who produces it, such as petroleum, notebook paper, produce, or perhaps milk.

• Understand that there are, for instance, different kinds of milk, but generally we buy milk not by brand but by price.

Chapter 7Section 2- Monopoly

Chapter 7Section 2- Monopoly

• Monopoly- a market dominated by a single seller (p. 156)

• Economies of Scale- factors that cause a producer's average cost per unit to fall as output rises (p. 157)

• Natural Monopoly- a market that runs most efficiently when one large firm supplies all of the output (p. 158)

• Government Monopoly- a monopoly created by the government (p. 159)

• Monopoly- a market dominated by a single seller (p. 156)

• Economies of Scale- factors that cause a producer's average cost per unit to fall as output rises (p. 157)

• Natural Monopoly- a market that runs most efficiently when one large firm supplies all of the output (p. 158)

• Government Monopoly- a monopoly created by the government (p. 159)

• Patent- a license that gives the inventor of a new product the exclusive right to sell it for a certain period of time (p.159)

• Franchise- the right to sell a good or service within an exclusive market (p. 159)

• License- a government-issued right to operate a business (p.159)

• Price Discrimination- division of customers into groups based on how much they will pay for a good (p. 163)

• Market Power- the ability of a company to change prices and output like a monopolist (p. 163)

Chapter 7Section 2 – Monopoly (cont’d)

Chapter 7Section 2 – Monopoly (cont’d)

Chapter SevenSection 3

Monopolistic Competition

and Oligopoly

Monopolistic Competition

• A market structure in which many companies compete to sell similar but not identical items.

• Goods are similar enough to be substituted for each other, but are all individually different.

Four Conditions

Four conditions of monopolistic competition:Many FirmsFew Artificial Barriers To EntrySlight Control Over PriceDifferentiated Products

Many Firms

• not marked by economies of scale or high start-up costs.

• firms can start selling goods and earning money after a small initial investment

• new firms spring up quickly to join the market.

Few Artificial Barriers To Entry

• Patents do not protect anyone from competition, either because they expired or because each firm sells a product that is distinct enough to fall outside the zone of patent protection.

• Just like perfect competition, monopolistically competitive markets include so many competing firms that competitors cannot work together to keep out new competitors.

Slight Control Over Price

• Have some freedom to raise and lower their prices because each firm’s goods are a little different

• some people are willing to pay more for the difference.

• monopolistically competitive market firm has only little control over it’s prices.

• Customers will substitute another manufacturer’s products if the prices get too high.

Differentiated Products

• Firms have some control over selling price because they can differentiate, or distinguish, their goods from the other products.

• The main difference between perfect competition and monopolistic competition is differentiation

• monopolistically competitive seller profits from differences between his or her products & competitors products.

Non-Price Competition

Characteristics of Non-Price Competition:Physical CharacteristicsLocationService LevelAdvertising, Image, Or Status

Oligopoly

• A market dominated by a few large, profitable firms.

• Oligopolies usually occur if four largest firms produce 70 to 80 percent of all the output.

• They may set higher prices, lower output

• They may help create barriers to entry

Oligopoly- Problems

• Cooperation– Price war - a series of competitive price cuts that lowers the

market price below the cost of production (p. 171)

– Price Fixing- an agreement among firms to charge one price for the same good (p.171)

• Collusion – an agreement among firms to divide the market, set prices, or

limit production (p. 1 71)

• Cartels – a formal organization of producers that agree to coordinate

prices and production (p. 171)

Comparisons

Perfect Competitio

n

Monopolistic

Competition

Oligopoly Monopoly

Number of Firms

Many Many A Few One

Variety of Goods

None Some Some None

Price Control

None Little Some Complete

Barriers to Entry

None Low High Complete

Examples Wheat, Stock

Jeans, Books

Cars Public Water

Chapter SevenSection 4

• Predatory pricing -selling below cost to drive competitors out of the market.

• Antitrust laws -laws that encourage competition in the marketplace.

• Trust -like a cartel, an illegal grouping of companies that discourages competition.

• Merger -combination of two or more companies into a single firm.

• Deregulation -the removal of some government controls over a market

The Sherman antitrust act was one way the government tried to regulate big business. This act was passed in 1890 but was not enforced until Theodore Roosevelt took up office in 1901. This law outlaws mergers and monopolies that restrain trade between states.

The Sherman Antitrust Act

The Clayton Antitrust Act

Outlaws practices that limit competition or lead to monopoly.

This law was passed in 1914 & helped to expand government control of big business.

The Robinson-Patman ActThe Robinson-Patman act defines & outlaws several forms of price discrimination.

Celler-Kefauver Act

The Celler-Kefauver act allows government to stop mergers that could hurt competition.

Examples of government intervention:

1) (1974) department of justice sues to end AT&T’s monopoly over local phone service

2) AT&T agrees to break up its local phone service into several companies.

3) In 1999 a federal judge finds that Microsoft is a monopoly.