Market Structures and Market Failures

What happens when markets do not work perfectly?

Characteristics That Define Market Structure  Number of Producers- the number of producers in a given market  Similarity of Products- the degree to which products in a market are similar  Ease of Entry- how easy it is to start a new business and compete with established businesses  Control over Price- how one can influence price by increasing or decreasing price. (Market Control)

Characteristics of “ Perfect Competition ”  Many Producers and Consumers- large numbers promote competition  Identical Products- Commodity  Products that are exactly the same no matter who produces it.

 Easy Entry into market- few restrictions  No Control over Prices- No market power

WIO: Perfect Competition  Make a simple sketch of a consumer and a producer. Add a thought bubble for each person that explains one of the benefits of perfect competition.

What is a Monopoly, and Why Are Some Legal.

 Monopoly- Single producer of a product that has no close substitutes.

Characteristics of Monopolies  One Producer- No competition  Unique Product- Only product of its kind, no good substitutes.

 High barriers to entry- limit or prevent others from entering market. (Main factor to why they exist)  Substantial Price Control-Great Market Power, no fear of undercutting.

Legal Monopolies  Resource Monopolies- control of a key natural resource, other firms have no access.

 Government-created monopolies created when in public interest  Natural Monopolies-when a firm can provide a good or service more efficiently than 2 or more companies.

Why Monopolies are bad for Consumers  Consumers may pay more than they would in a competitive market  Monopolies have less incentive to innovate or to satisfy consumers.

 Strong possibility of lesser product quality and fewer product choices.

Characteristics of an Oligopoly  Oligopoly- a market or an industry dominated by just a few firms that produce similar or identical products.

 Few Producers  Similar Products  High barriers to entry  Some control over prices

Characteristics of Monopolistic Competition  Monopolistic Competition- Large number of producers providing goods that are similar but varied.

 Many Producers  Differentiated Products  Few barriers to entry  Some control over prices.

WIO: Comparison Chart Market Structures Perfect Competition Monopolistic Oligopoly Number of Producers Products Ease of Entry Price Control Good Descriptions!

(May use book to help out) Monopoly

Market Failures: Externalities and Public Goods  Market Failure: economy fails to use all its resources effectively and efficiently  Externality: Side effect of production or consumption that has consequences for people other than consumer or producer (examples: factory pollution, Corn Syrup company odor, etc.)  Negative externality: cost that falls on someone other than producer or consumer

Market Failures: Externalities and Public Goods  Positive Externality: benefit that falls on someone other than the producer or consumer (ex: neighbor’s flower bed, company creating a less pollutant vehicle, getting a college education)  Technology spillover: technical knowledge from one company spreads to another company or individual (ex: more efficient car = more pollution control

Problems of Private and Public Goods:  Public goods: goods and services that are not provided by the market system because of the difficulty of getting people who use them to pay for their use (examples: fire and police, national defense, public parks)  Private goods: goods and services that are sold in markets

Private vs. Public goods  Private goods are excludable, which means if you don’t pay for the good, you don’t get to use it (example: buying an apple)  Public goods are nonexcludable, which means everyone can use it (example: streetlight)

Private vs. Public goods  Private goods are a rival in consumption: good can’t be consumed by more than one person at the same time (eating an apple)  Public goods are nonrival in consumptions, meaning more than one can enjoy at same time (streetlight)