economics chapter 7: market structures economics chapter 7: market structures 1. perfect competition...

Economics Chapter 7:Economics Chapter 7:

Market StructuresMarket Structures

Economics Chapter 7: Economics Chapter 7: Market StructuresMarket Structures

1. 1. Perfect CompetitionPerfect Competition is is when a large number of when a large number of buyers and sellers exchange buyers and sellers exchange identical products under 5 identical products under 5 conditions.conditions.


5 Conditions Characterize Perfect Competition5 Conditions Characterize Perfect Competition

A large number of buyers and sellersA large number of buyers and sellers Buyers and sellers deal in identical productsBuyers and sellers deal in identical products

No need to advertiseNo need to advertise No need for brand namesNo need for brand names

Each buyer and seller acts independentlyEach buyer and seller acts independently Buyers and sellers are reasonably well-informed Buyers and sellers are reasonably well-informed

about products and pricesabout products and prices Buyers and sellers are free to enter into, Buyers and sellers are free to enter into,

conduct, or get out of business.conduct, or get out of business.


Under Under perfect competitionperfect competition, , supply and demand set the supply and demand set the equilibrium price, and each equilibrium price, and each firm sets a level of output firm sets a level of output that will maximize its profits that will maximize its profits at that price.at that price.


Imperfect CompetitionImperfect Competition is the is the name given to a market name given to a market structure that lacks one or structure that lacks one or more of the 5 conditions of more of the 5 conditions of perfect competition.perfect competition.


2.2. Monopolistic CompetitionMonopolistic Competition is the market structure that is the market structure that has all the conditions of has all the conditions of perfect competition except perfect competition except for identical products.for identical products.


11stst left hand page Question #1 left hand page Question #1

What are some examples of how What are some examples of how different jean companies different jean companies differentiate their products?differentiate their products?


Monopolistic competitors use Monopolistic competitors use Product DifferentiationProduct Differentiation – real or – real or imagined differences between imagined differences between competing products in the same competing products in the same industry.industry.


Monopolistic competitors use Monopolistic competitors use Non-Price CompetitionNon-Price Competition – the use – the use of advertising, giveaways, or of advertising, giveaways, or other promotional campaigns to other promotional campaigns to convince buyers that the product convince buyers that the product is somehow better than another is somehow better than another brand – often takes the place of brand – often takes the place of price competition.price competition.


11stst left hand page Question #2 left hand page Question #2

Name your favorite brands of the Name your favorite brands of the following items: Jeans, Shampoo, following items: Jeans, Shampoo, Perfume (Cologne for guys), Tennis Perfume (Cologne for guys), Tennis Shoes, and Make-up (cars for guys). Shoes, and Make-up (cars for guys). Explain why you like each of the Explain why you like each of the brands over other products that are brands over other products that are the same. Did advertisement of the same. Did advertisement of these products influence your these products influence your choice? If so, how?choice? If so, how?


Monopolistic CompetitorsMonopolistic Competitors usually advertise or promote usually advertise or promote heavily. This is why they are heavily. This is why they are able to charge more for able to charge more for “designer” jeans.“designer” jeans.


The The Monopolistic CompetitorMonopolistic Competitor can enter the market easily. can enter the market easily. If they can convince If they can convince consumers their product is consumers their product is better, they can charge a better, they can charge a higher price.higher price.


22ndnd left hand page Question #1 left hand page Question #1

Find 2 advertisements in a Find 2 advertisements in a newspaper or magazine of like newspaper or magazine of like items. Glue in notebook and items. Glue in notebook and List how the advertisements try List how the advertisements try to show their product is better to show their product is better than the other item.than the other item.


3. 3. OligopolyOligopoly is a market is a market structure in which a few very structure in which a few very large sellers dominate the large sellers dominate the industry. industry.


The product of an Oligopoly The product of an Oligopoly may be may be differentiateddifferentiated as in as in the auto industry or the auto industry or standardizedstandardized as in the steel as in the steel industry. industry.


Examples – Pepsi, Coke, Examples – Pepsi, Coke, McDonalds, Burger King, McDonalds, Burger King, Jack-In-The-Box, and Jack-In-The-Box, and Wendy’sWendy’s

Because oligopolies are so Because oligopolies are so large, whenever one firm large, whenever one firm acts, the other firms usually acts, the other firms usually follow.follow.


Oligopolists may all agree Oligopolists may all agree formally to set prices, called formally to set prices, called collusioncollusion, which is illegal , which is illegal (because it restricts trade). (because it restricts trade).


2 Forms of Collusion2 Forms of Collusion price fixingprice fixing – agreeing to – agreeing to

charge same or similar charge same or similar prices for a product (which is prices for a product (which is often above market price).often above market price).

Dividing up the market for Dividing up the market for guaranteed sales.guaranteed sales.


Because Oligopolists tend to Because Oligopolists tend to act together when it comes act together when it comes to changing prices, most to changing prices, most firms tend to compete on a firms tend to compete on a non-price basis by non-price basis by advertising or by enhancing advertising or by enhancing their products with new or their products with new or different features.different features.


4. 4. MonopolyMonopoly – is a market – is a market structure with only one seller structure with only one seller of a particular product. of a particular product.


4 Types of Monopolies4 Types of MonopoliesNatural MonopolyNatural Monopoly is a market is a market

situation where the costs of situation where the costs of production are minimized by production are minimized by having a single firm produce having a single firm produce the product or provides a the product or provides a service because it minimizes service because it minimizes the overall costs (public the overall costs (public utilities).utilities).


Geographic MonopolyGeographic Monopoly occurs when the location occurs when the location cannot support two or more cannot support two or more such businesses (small town such businesses (small town drug store).drug store).


Technological MonopolyTechnological Monopoly occurs occurs when a producer has the when a producer has the exclusive right through patents exclusive right through patents or copyrights to produce or sell or copyrights to produce or sell a particular product (an artist’s a particular product (an artist’s work for his lifetime plus 50 work for his lifetime plus 50 years).years).


Government MonopolyGovernment Monopoly occurs when the government occurs when the government provides products or provides products or services that private industry services that private industry cannot adequately provide cannot adequately provide (uranium processing).(uranium processing).


Market FailuresMarket Failures occur when occur when sizeable deviations from one sizeable deviations from one or more of the conditions or more of the conditions required for perfect required for perfect competition take place.competition take place.


5 Reason Markets Fail5 Reason Markets Fail1. 1. Inadequate CompetitionInadequate Competition Inefficient resource allocation – Inefficient resource allocation –

because no competitionbecause no competition Higher prices and reduced outputHigher prices and reduced output Economic and political power → ask Economic and political power → ask

for tax break and threaten to move if for tax break and threaten to move if don’t get it.don’t get it.

Not enough demand to have Not enough demand to have competitioncompetition


2. 2. Inadequate InformationInadequate Information

3. 3. Resource ImmobilityResource Immobility – this – this means that land, capital, labor, means that land, capital, labor, and entrepreneurs do not move and entrepreneurs do not move to markets where returns are to markets where returns are the highest. Instead they tend to the highest. Instead they tend to stay put and sometimes remain stay put and sometimes remain unemployed. unemployed.


4. 4. ExternalitiesExternalities – or unintended side – or unintended side effect that either benefits or harms a effect that either benefits or harms a 3rd party not involved in the activity 3rd party not involved in the activity that caused it. (positive and that caused it. (positive and negative externalities). negative externalities).

Externalities are regarded as market Externalities are regarded as market failures because they are not failures because they are not reflected in the market prices of the reflected in the market prices of the activities that caused the side activities that caused the side effects.effects.


5. 5. Public GoodsPublic Goods – are products that – are products that are collectively consumed by are collectively consumed by everyone and whose use by one everyone and whose use by one individual does not diminish the individual does not diminish the satisfaction or value available to satisfaction or value available to others.others.

(ex) national defense and public (ex) national defense and public education. A market fails because it education. A market fails because it cannot withhold supply from those cannot withhold supply from those who refuse to pay.who refuse to pay.


Role of The GovernmentRole of The Government

Anti-trust laws prevent or break Anti-trust laws prevent or break up monopolies, preventing up monopolies, preventing market failures due to market failures due to inadequate competition.inadequate competition.


The Sherman Anti-Trust Act of 1890The Sherman Anti-Trust Act of 1890 was enacted to prohibit trusts, was enacted to prohibit trusts, monopolies, and other arrangements monopolies, and other arrangements that restrain competition.that restrain competition.

The Clayton Anti-Trust ActThe Clayton Anti-Trust Act was was passed in 1914 to outlaw passed in 1914 to outlaw price price discriminationdiscrimination (the practice of (the practice of charging customers different prices charging customers different prices for the same product).for the same product).


The Federal Trade Commission The Federal Trade Commission (1914) was empowered to issue (1914) was empowered to issue cease and desist orders, requiring cease and desist orders, requiring companies to stop unfair business companies to stop unfair business practices.practices.

The Robinson-Patman Act of 1936The Robinson-Patman Act of 1936 was passed to strengthen the price was passed to strengthen the price discrimination provisions of the discrimination provisions of the Clayton Anti-Trust Act.Clayton Anti-Trust Act.


Government’s goal in Government’s goal in regulating is to set the same regulating is to set the same level of price and service level of price and service that would exist if a that would exist if a monopolistic business monopolistic business existed under competitionexisted under competition..


Public DisclosurePublic Disclosure is used as a is used as a tool to promote competition. tool to promote competition. Any corporation that sells its Any corporation that sells its stocks publicly is required to stocks publicly is required to supply financial reports to both supply financial reports to both its investors and to the SEC its investors and to the SEC (Securities Exchange (Securities Exchange Commission).Commission).


The purpose of public The purpose of public disclosure is to provide disclosure is to provide adequate information to adequate information to prevent market failures.prevent market failures.


Corporations, banks, and Corporations, banks, and other lending institutions other lending institutions must disclose certain must disclose certain information. There are also information. There are also “truth-in-advertising” laws “truth-in-advertising” laws that prevent sellers from that prevent sellers from making false claims about making false claims about their products.their products.


Modified Free EnterpriseModified Free Enterprise

Government intervenes in the Government intervenes in the economy to encourage economy to encourage competition, prevent competition, prevent monopolies, regulate industry, monopolies, regulate industry, and fulfill the need for public and fulfill the need for public goods.goods.


Today’s U.S. economy is a Today’s U.S. economy is a mixture of different market mixture of different market structures, different kinds of structures, different kinds of business organizations, and business organizations, and varying degrees of varying degrees of government regulation.government regulation.


The The

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economics chapter 7: market structures economics chapter 7: market structures 1. perfect competition...

Documents

market structures1st

market structures2nd

market structures3

market structuresoligopolists

market structuresthe

market structures5 conditions

monopolistic competition

nonprice competition