Chapter 7: Market Structures
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Transcript Chapter 7: Market Structures
CHAPTER 7: MARKET
STRUCTURES
S1: Perfect Competition
S2: Monopoly
S3: Monopolistic Competition and Oligopoly
S4: Regulation and Deregulation
BELL WORK
Grab workbook pages
3 hole punch and put in folder
Answer the Ch. 7 Warmup
A-C
S1: MARKET STRUCTURES
“What are the characteristics of Perfect
competition?”
Objectives
4 conditions of a perfectly competitive market
2 common barriers that prevent firms from entry
Prices/output in perfectly competitive market
Key terms
http://www.pearsonsuccessnet.com/snpapp/iText/products/0-13369833-5/Flash/Ch07/Econ_OnlineLectureNotes_ch7_s1.swf
INTRODUCTION
Characteristics of perfect competition?
Many buyers/sellers
Identical products
Informed buyers/sellers
Free market entry/exit
PERFECT COMPETITION
Simplest market structure
Also called pure competition
Perfectly Competitive Market:
Large # of firms
Firms producing same products
Assumes market is in equilibrium
Assumes firms sell same product at same price
CONDITIONS OF PERFECT COMPETITION
Only few perfectly competitive markets
Tough b/c markets must meet 4 strict conditions
Many buyers/sellers participating in market
Sellers offering identical products
No difference in products sold: gas, paper, sugar.
Buyers/sellers well-informed about products
No 1 person/firm can be too powerful so to influence total
market qty. or price
Market provides plenty of info to buyers. Understand
features, price, and other info about product
Sellers are able to enter/exit market freely
Very easy to enter/exit a perfect market
Entrance when popular; exit when demand decreases
BARRIERS TO ENTRY
Barriers lead to imperfect competition
Barriers can include:
Start-up costs:
When start-up costs are high it is more difficult for new
firms to enter market
Markets w/high start-up costs are less likely to be perfectly
competitive.
Technology
Markets that require high degree of technical knowledge
can be difficult to enter into w/out preparation and stu
PRICE AND OUTPUT
Perfectly competitive markets are efficient and
competition keeps both prices/production costs
low.
Prices (in PC Market) correctly represent the
opportunity costs of each product
Also provide the lowest sustainable prices possible.
Output
B/c of PC Market, no supplier can greatly influence
prices. Producers make their decisions based on most
efficient use of resources.
LESSON CLOSING
Pearsson Resources
Visual Glossary
Action Graph: Market Equilibrium
“Exit Pass”
Critical Thinking; 8-10
Also have answers for tomorrow
Workbook Work
Chapter Work pgs. 57 and 131
Identifying Perfect Competition worksheet
7.2: MONOPOLY
BW: Refresh self on Critical thinking 8-10 pg. 163
Finish workbook work….
CRITICAL THINKING
1.
Which markets are close to Perfect competition
1.
2.
Commodities?
1.
3.
Buyers would make decisions based on differences b/t
products
Barriers to entry
1.
6.
Products must be identical, buyers will not pay more for
one producers good
What would happen today?
1.
5.
Products same regardless of producer
Why must PC markets always deal in commodities?
1.
4.
Paper clips and white socks
Factors that make it difficult to enter a market
2 other specific examples
1.
Difficulty in finding raw materials, difficulty in finding
workers
7.2: MARKET STRUCTURES
“Characteristics of a monopoly?”
Objectives
Characteristics/examples of a monopoly
How monopolies, including govt., are formed
How firm w/monopoly makes output decisions
Why monopolists sometimes practice price
discriminations
Key Terms
http://www.pearsonsuccessnet.com/snpapp/iText/products/0-13369833-5/Flash/Ch07/Econ_OnlineLectureNotes_ch7_s2.swf
INTRODUCTION
What are
characteristics
of a Monopoly?
Single Seller
Many barriers
to entry for new
firm
No variety of
goods
Complete
control of price
CHARACTERISTICS OF A MONOPOLY
Characteristics
Single seller in market
Many barriers to entry
Supply unique product w/no close substitute
Having market cornered
Change high prices
Quantity of goods lower than in competitive market
FORMING A MONOPOLY
Economies of Scale
Different market conditions create different types of
economies
Some monopolies enjoy this
Characteristics that cause a producers av. Cost to drop as
production rises
Natural Monopolies
Market that runs most efficiently when one large firm
provides output
Public water is an example
If it wasn’t a natural we would use too much, and be
inefficient
Technology can destroy a natural monopoly. Read pg.166
Can cut fixed costs to make small companies compete
w/large firms
FORMING A MONOPOLY
Govt. actions that lead to monopolies
Issuing a patent: gives exclusive rights to sell
good/service
Granting a franchise: gives single firm right to sell its
goods w/in an exclusive market
Issuing a license- allows firms to operate a business,
especially where scarce resources are involved
Restricting number of firms in a market
OUTPUT DECISIONS:
Monopolists Dilemma: Choose PRICE or OUTPUT
They think BIG PICTURE to maximize profits
Produce fewer goods @ higher prices
Can be viewed in terms of demand
Buyers will demand more of a good @ lower prices
BUT the more a monopolist produces, the less they will
receive in profits.
Falling Marginal Revenue
Key difference in PCs and Monopolies
PCs marg. Rev.= price, each firm receives same price no
matter production
Not true for monopolies
OUTPUT DECISIONS:
Setting a Price
Marginal revenue is lower than market price in
monopolies
Setting a Price Action Graph
Question: Where does a monopolist usually set
output and price compared to PC market?
Monopolist sets output lower and price higher than
seller in a PC market
PRICE DISCRIMINATION
Many cases the monopolist charges the same price to
all customers
Some instances they don’t: Called Price
Discrimination
Idea that each costumer has a maximum price that he/she
will pay for a good
Targeted Discounts: targeting particular groups
Discounted airline fares
Senior citizens/students
Children promotion
Limits: must me 3 conditions
Firms must have market power
Customers divided into distinct groups
Buys must not be in a position in which they can easily resell
good/service.
LESSON CLOSING
Pearsson Success
Economies of scale graph
Setting a price action Graph
Demand schedule for Breathedeep Graph
Case Study: Book/Video
Monopoly: Chart Skills
“Exit Pass”
Critical Thinking 8-11
BELL WORK
Finish Critical Thinking: Watch Competition
Video
Workbook Pg. 58, 138
“Perfect Competition”
CH. 7.3
“What are the characteristics of monopolistic
competition and oligopoly?”
Objectives
Characteristics/Examples of monopolistic competition
How Firms compete w/out lowering prices
How firms in monopolistic competitive market set
output
Characteristics/examples of an oligopoly
Key Terms
http://www.pearsonsuccessnet.com/snpapp/iText/produc
ts/0-13-3698335/Flash/Ch07/Econ_OnlineLectureNotes_ch7_s3.swf
INTRODUCTION: CHARACTERISTICS OF
MONOPOLISTIC COMPETITIONS AND OLIGOPOLY
Monopolistic
Many firms in Market
Some variety of goods
Minimal barriers to
entry
Little control over
prices
Oligopoly
Few firms in the
market
Some Variety of Goods
Many Barriers to
Entry
Some control over
prices
MONOPOLISTIC COMPETITION
Many companies compete in an open market to sell
similar, but not identical, products
Examples
Specialty Shops (bagel, coffee, candy)
Gas Stations
Retail Stores
Jean Stores
Conditions
Many Firms: Low start-up costs allows large entry
Few Barriers: Easy for new firms
Little control over Price: Firms can’t raise prices much for
fear of costumers going elsewhere
Differentiated Products
Allows a firm to profit from the differences b.t their product
and competitor’s
NONPRICE COMPETITION
NonPrice competitions can be another way firms
differentiate their products
Physical Characteristics
Location
Size, color, shape, texture can all differentiate
Convenience of location is huge!
Advertising, Image, or Status
Look around…. Why do some people buy one T-shirt over
another? They both cover your bodies?
PRICES
Prices, Output, and profits under monopolistic
competition structures look similar to PC Market
Prices
Output
Prices are higher than PC market but demand curve
is more Elastic b/c customers can choose substitutes
Elasticity in MC firms causes total output to fall
between a monopoly and PC market
Profits
Can earn just enough to cover all of costs
Short term profits, but competition makes profit hard
to maintain
OLIGOPOLY
Market dominated by few, profitable firms
Barriers to Entry
Can be technological or created by system of govt.
licenses or patents
Economies of scale can also lead to oligopoly
3 Practices that concern Govt. from Oligopolies
Price Leadership: can lead to price wars
Collusion: Leads to price fixing and is illegal
Agreement among oligopoly leaders to set prices/output
Cartels: Organization of producers that agree to fix
production/prices (OPEC) (See 178)
Also illegal in U.S.
Survive if every member sticks to plan
LESSON CLOSING
Virtual Economics Activity w/partner
Maintaining competition
Due Next Friday
Go in as Project Grade
Workbook pgs
59, 145
BELL WORK
Get books/notes out
Answer Main ideas 3-7 on small sheet of paper
CHAPTER 7.4
“When does the govt. regulate competition?”
Objectives
How firms might try to increase their market
3 market practices the govt. regulates or bans to
protect competition
What is regulation, and its effects on some industries
Key Terms
http://www.pearsonsuccessnet.com/snpapp/iText/produc
ts/0-13-3698335/Flash/Ch07/Econ_OnlineLectureNotes_ch7_s4.swf
INTRODUCTION
When does the govt. regulate competition?
Govt. sometimes takes steps to promote competition
to promote lower prices
Done through….
Anti-trust laws
Approving/not approving mergers
Deregulation
INCREASING MARKET POWER
Monopolies/Oligopolies
are viewed as bad for
consumers and
economy
Firms try and merge
with one another and
drop prices in order to
gain more market
power and push others
out
GOVT. AND COMPETITION
Fed. Govt. has policies know as anti-trust laws
Meant to keep firms from gaining too much market
power
FTC and DOJs Antitrust Division watch firms to
make sure they only act fairly
History of Antitrust Policy
Despite laws, companies have used other strategies
to gain market control
3 GOVT. ACTIONS
Regulating Businesses
Govt. can regulate companies that try to get around
antitrust laws
1997, DOJ accuses Microsoft of using near-monopoly
over the operating system market to try to take
control of the browser market
Judge ruled against Microsoft.
MSFT could not force computer manufacturers to provide
only MSFT software on new computers
3 GOVT. ACTIONS CONT’D
Blocking Mergers
Govt. can block mergers to prevent rise of monopolies
Also checks in on past mergers to make sure they are
not leading to monopolies
Govt. looks to predict effects of merger before approval
Corporate Mergers
Can benefit consumers too
Lower average prices which leads to:
Lower prices
More reliable products/services
More efficient industry
DEREGULATION
Govt. no longer decides what role each company
can play in market and how much it can charge
Some regulation had been seen to reduce
competition, leading to deregulation
Examples of Deregulation
Airlines
Trucking
Banking
Natural Gas
RR
Television Broadcasting
JUDGING DEREGULATION
How does it encourage competition?
Many new firms usually enter right away
Often weeds out weaker players in long-run
Example
When airlines deregulated, many new firms entered
market, but some eventually failed
Competition increased among airlines and prices
went down
LESSON CLOSING
How the Economy Works Video
Start on Essay
Complete All of Workbook for Ch. 7
Study day Monday
Test Tuesday