Transcript Perfect Competitions

Economics Chapter 7
Competition
Perfect competition is when a large number of buyers and sellers
exchange identical products under 5 conditions (see pg. 154)
1. There should be a large number of buyers and sellers
2. The products should be identical
3. Buyers and sellers should act independently
4. Buyers and sellers should be well-informed.
5. Buyers and sellers should be free to enter, conduct, and/or
get out of business.
More on Perfect Competition
 Under
, supply and demand set
the equilibrium price, and each firm sets a level of
output that will maximize its profits at that price.
refers to market structures
that lack one or more of the five conditions of perfect
competitions.
 Imagine our local open farmers’ markets during the
spring and summer. How might these markets meet
each condition for a perfectly competitive market?
 Meets all conditions of perfect competition except for identical
product.
 Uses product differentiation – the real or imagined differences
between competing products in the same industry.
 Uses nonprice competition, the use of advertising giveaways, or
other promotional campaigns to differentiate their products from
similar products.
 Sell within a narrow price range but try to raise the price within
that range to achieve profit maximization.
 What are some examples of how jean companies differentiate
their products?
Oligopoly
 Oligopoly is a market structure in which a few very large sellers
dominate the industry.
 Oligopoly is further away from perfect competition (freest trade)
than monopolistic competition.
 Oligopolists act interdependently by lowering prices soon after
the fest seller announces the cut, but typically they prefer
nonprice competition because their rivals cannot respond as
quickly.
 Oligopolists may all agree formally to set prices, called collusion,
which is illegal (because it restricts trade).
1. Price-fixing – agreeing to charge a set market price, often above
market price
2. Dividing up the market for guaranteed sales.
Oligopoly continued
 Oligopolists can engage in price wars, or a series of
price cuts that can push prices lower than the cost of
production for a short period of time.
 Oligopolists’ final prices are likely to be higher than
under monopolitic competition and much higher than
under perfect competition.
Monopoly
 Monopoly is a market structure with only one seller of a particular
product.
 The U.S. has few monopolies because Americans prefer
competitive trade.
 Natural monopoly occurs when a single firm produces a product or
provides a service because it minimizes the overall costs (public
utilities)
 Geographic monopoly occurs when the location cannot support
two or more of some type of business (ex: small town drugstore)
 Technological monopoly occurs when a producer has the exclusive
right through patents or copyrights to produce or sell a particular
product (an artist’s work for his lifetime plus 50 years)
Monopoly continued
 Government monopoly occurs when the government
provides products or services that private industry
cannot adequately provide (uranium processing)
 The monopolist is often larger than a perfect
competitor, allowing it to be the price maker versus the
price taker.
 (See comparison chart and graph on pages 159-160)
 Why are monopolies unappealing to Americans?
Inadequate Competition
 Decreases in competition because of mergers and acquisitions can
led to several consequences that create market failures.
 Inefficient resource allocation often results when there’s no
incentive to use resources carefully.
 Reduced output is one way that a monopoly can retain high prices by
limiting supply.
 A large business can exert its economic power over politics.
 Market failures on the demand side are harder to correct than
failures on the supply side.
Inadequate Information
 Consumers, businesspeople, and government officials must be
able to obtain market conditions easily and quickly.
 If they cannot, it is an example of market failure.
 What resources would you check to find out how the weather has
affected the citrus industry this year?
Resource Immobility
 Resource immobility occurs when land, capital, labor,
and entrepreneurs stay within a market where returns
are slow and sometimes remain unemployed.
 When resources will not or cannot move to a better
market, the existing market does not always function
efficiently.
Externalities
 Externalities are unintended side effects that either benefit or
harm a third party.
 Negative externalities are harm, cost, or inconveniences
suffered by a third party.
 Positive externalities are benefits received by someone who
had nothing to do with the activity that created the benefit.
 Externalities are market failures because the market prices
that buyers and sellers pay do not reflect the costs and/or
benefits of the action.
Public Goods
 Public goods are products everyone consumes
 The market does not supply such goods because it
produces only items that can be withheld if people
refuse to pay for them; the need for public goods is a
market failure.
Public Disclosure
 Public disclosure requires businesses to reveal
information about their products or services to the
public.
 The purpose of public disclosures is to provide adequate
information to prevent market failures.
 Corporations, banks, and other lending institutions must
disclose certain information. There are also “truth-inadvertising” laws that prevent sellers from making false
claims about their products. (see chart pg. 171)
Indirect Disclosure
 Indirect disclosure includes government’s support of the
Internet and the availability of government documents
on government Web sites.
 Businesses post information about their about their own
activities on their own Web sites.
Modified Free Enterprise
 Government intervenes in the economy to encourage
competition, prevent monopolies, regulate industry, and fulfill
the need for public goods.
 Today’s U.S. economy is a mixture of different market
structures, different kinds of business organizations, and
varying degrees of government regulation.