Transcript Market Structures

Market Structures
Chapter 7
Perfect Competition, 7.1
I. Perfect Competition is a market structure
in which a large number of firms all
produce the same product
II. Four conditions for
perfect competition
A. Many buyers and sellers participate in
the market
B. Sellers offer identical products
1. Commodity a product that is
considered the same no matter
who produces it
a. Feed corn for cattle is a
commodity
Four Conditions for
Perfect Competition
C. Buyers and sellers are well informed
about products
1. A buyer is not willing to spend a
lot of time and energy researching
the market when the savings to be
made are small
D. Sellers are able to enter and exit the
market freely
III. Barriers to Entry
A. Start-up costs the expenses a firm
must pay before it can begin to
produce and sell goods
1. An entrepreneur wishing to own a
clothing store must rent a building,
hire workers, and buy clothing for
the business
2. A person who wishes to practice
medicine is required to attend
medical school, complete an
internship, and pass a state exam.
Barriers to Entry
 Technology
 Cable companies must
lay miles of
underground cable
before they can serve
a single customer in a
new market
 One of the effects that
the Internet has had
on business is that it
reduced start-up costs
for many businesses
IV. Price and output
A. Companies in a perfectly competitive
market have no control over price
B. Price war is a series of competitive price
cuts that lowers the market price below
the cost of production
Describing monopoly
A. Monopoly a market dominated by a
single seller
II. Forming a monopoly
A. Economies of scale
1. Firms enjoy economies of
scales when its average total cost
will decrease as production
increases.
2. An example of economies of
scale is a ranch increases its
profits by expanding from 400 to
800 cattle without buying or
renting additional land
B. Natural monopolies
1. Natural monopoly a single firm supplies all the
output.
a. Natural monopoly is most efficient when
one large firm supplies all of the output
b. Natural monopolies in the past 30 years
1. Electricity
2. Water
3. Phone service
III. Government
monopolies
A. Patents, franchises, and licenses can
lead to monopolies
B. Technological
monopolies
1. Patent a license that gives the inventor
of a new product the exclusive right to
sell it for a certain period of time
a. The government
sometimes gives monopoly
power to a company by
issuing a patent
because it makes a product
better than anyone else’s
C. Franchises and licenses
1. Franchise the right to sell a good or
service within an exclusive market
2. License a government-issued right to
operate a business
D. Industrial organization
1. One kind of monopoly that the U.S.
government generally permits, is
professional sports leagues
IV. Output decisions
A. The monopolist’s dilemma
B. Marginal revenue
1. A monopolist will set its production at a
level where marginal cost is equal to
marginal revenue.
C. Setting a price
1. In a monopoly market, the market price
will be greater than the price in a
perfectly competitive market.
V. Price discrimination division of
customers into groups based on how
much they will pay for a good
A. Companies practice price discrimination
because they recognize that groups of
consumers are willing and able to pay
different amounts and maximizes profits
by charging each group a different price.
Monopolistic Competition
and Oligopoly, 7.3
I. Monopolistic Competition: Many
companies selling similar but not identical
products
A. Companies that sell book bags are
examples of monopolistic competition
II. Four Conditions of
Monopolistic Competition
A.
B.
C.
D.
Many firms
Few artificial barriers to entry
Slight control over price
Differentiated products
1. Differentiation: Making a product unlike
other products
III. Non-Price Competition
A. Physical characteristics
B. Location
C. Service level
D. Advertising image
IV. Price, Output, and
Profits
A. Prices
1. If a monopolistically competitive firm begins to
charge an excessive price for its products,
consumers will substitute a rival’s products
B. Output
C. Profit
D. Production costs and variety
1. Many firms will earn profit in the short term, but
they must constantly innovate and compete to
earn profits in the long term in a monopolistically
competitive market.
Oligopoly
V. Oligopoly: a market structure in which a few
large firms dominate a market.
A. Also an oligopoly is two to four firms
producing 70 to 80 percent of the output
B. Example of an oligopoly:
1. Sunshine Island has three large
supermarkets that supply most of the
island’s population. A gas station also sells
a very small selection of groceries.
Oligopoly
C. Barriers of entry
D. Cooperation and collusion
1. Price war a series of competitive
price cuts that lowers the market price
below the cost of production
E. Cartels are difficult to operate because
they work only if members keep to their
agreed output.
Regulations and
Deregulation, 7.4
I. Market Power
II. Government and Competition
A. Trust: an illegal grouping of companies that
discourages competition
1. Sherman Antitrust Act: The federal
government won the power to prevent
monopolies and mergers that interfered
with competition
B. Regulating business practices
C. Breaking up monopolies
1. These companies have been
forced to split up by the federal
government
a. AT&T
b. American Tobacco
Company
c. Standard Oil Trust
D. Blocking mergers
1. Merger combination of two or
more companies into a single firm
E. Preserving incentives
Deregulation
III. Deregulation the removal of some
government controls over a market
A. When the government deregulates
a product or service, some
government regulations over the
industry are eliminated.
B. Airlines have been deregulated in
recent years