Transcript Ch. 7 section 1 Perfect Competition & Monopoly

Ch. 7 section 1
Perfect Competition & Monopoly
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MARKET STRUCTURES, Important features of
a market, including the number of buyers and
sellers, product uniformity across sellers, ease
of entering the market, and forms of competition
PERFECT COMPETITION, A market structure
with many fully informed buyers and sellers of
an identical product and ease of entry.
COMMODITY, A product that is identical across
sellers, such as bushel of wheat
Commodity
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A buyer is not willing to pay more for one
particular supplier’s product.
Buyers are concerned only with the price.
Perfect Competition
Buyers are fully informed about the price,
quality, and availability of products, and
sellers are fully informed about all
resources and technology.
Perfect Competition
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Firms can easily enter or leave the
industry. No obstacles preventing new
firms from entering profitable.
A perfectly competitive firm is so small
relative to the size of the market that the
firm’s choice about how much to produce
has no effect on the market price.
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Ex. Microsoft, general electric
Foreign exchange, yen, euros, pounds
Agricultural products, livestock, corn,
wheat
Many buyers & sellers that the actions of
any one cannot influence the market price.
Market Price
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Panel who decides the price of product.
Wheat $5 bushel of wheat.
Look at the graph
The demand curve facing an individual
farmer is, a horizontal line drawn at the
market price.
Monopoly
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Monopoly, are sole supplier of a product
with no close substitutes. Greek “one
seller”.
A monopolist has more market power than
does a business in any other market
structure.
Market power
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Is the ability of a firm to raise its price w/o
losing all sales to rivals.
A perfect competitor has no market power.
It has high barriers to entry, restrictions on
the entry of new firms into an industry.
Allows to charge a price above the
competitive price.
Legal Restrictions
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Prevent new firms from entering a market is to
make entry illegal.
Patents, licenses, and other legal restrictions
imposed by the government provide some
producers w/ legal protection against
competition.
Govn’t confer monopoly rights to sell hot dogs at
civic auditoriums, collect garbage, offer bus &
taxi service, & supply other services ranging
electricity to cable t.v. .
Ex. Legal restrictions
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Many states are monopolies sellers of
liquor and lottery tickets.
The U.S. Postal Service (USPS) exclusive
right to deliver first-class mail.
Economies of scale
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A monopoly sometimes emerges naturally when
a firms experiences substantial economies of
scale, as reflected by the downward-sloping ,
long-run average cost curve.
Single firm satisfy market demand at a lower
average cost per unit than could two or more
smaller firms.
Market demand is not great enough to allow
more than one firm to achieve sufficient
economies of scale.
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A monopoly that emerges from the nature of
costs is called a natural monopoly.
New entrant cannot sell enough output to
experience the economies of scale enjoyed by
an established natural monopolist. Entry into
the market is naturally blocked .
Less populated areas, natural monopolies
include the only grocery store, movie theater,
restaurant for miles around. (geographic
monopolies).
Control of Essential Resources
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Control of critical resources
Decades Alcoa controlled bauxite,
aluminum.
China is a monopoly supplier of panda to
the world zoo’s.
Since 1930s, world’s diamond trade De
Beer.
Monopolists may not earn a profit
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The demand curve for a monopolist’s output
also is the market demand curve.
True monopolies are rare b/c a profitable
monopoly attracts competitors & substitutes.
Technological changes may allow for new
entries into new monopolies.
Monopoly and Efficiency
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Monopoly Versus Perfect Competition
Competition forces firms to be efficient- that is ,
to produce the maximum possible output form
available resources- and to supply the product
at the lowest possible price.
Consumers get a substantial consumer surplus
from this low price. Monopolists would charge
more than competitive firms, fewer consumers
will be able to afford to buy the product.
Other problems w/ Monopoly
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Resources wasted securing monopoly privilege.
Influence political system, which thy use to
protect and strengthen their monopoly power.
Lawyer’s fee, lobbying expenses, gathering
special privileges from govn’t are largely a
social waste. Scarce resources are not added to
output of unit.
Monopolies may grow inefficient,lazy, fat, not
innovative in production techniques, reluctant to
make new products.
Continued
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Economies of scale-a monopolist might be able
to produce output at a lower average cost than
could competitive firms. Price, or the cost of
production could be lower w/ monopoly than w/
perfect competition.
Government regulation-intervention increase
social welfare
Keeping Prices low to avoid regulation
Keeping Prices low to avoid competiton