7-1: WHAT IS PERFECT COMPETITION?

Competition

 Economists classify markets based on how competitive they are  Market structure: an economic model

of competition among businesses in the same industry

Perfect Competition

 Definition: ideal

model of a market economy

 Perfect competition is

used as a basis to determine how competitive a market is

5 Characteristics of Perfect Competition

 1. Numerous buyers and sellers  This ensures that no single buyer or seller has the power to control the price in the market

5 Characteristics of Perfect Competition (continued)



Buyers have lots of options



Sellers are able to sell their products at market price

 2. Standardized product 

A product that consumers see as identical regardless of the producer

 Example: milk, eggs, etc.

Characteristics of Perfect Competition (continued)

 3. Freedom to enter and exit markets 

Producers enter the market when it is profitable and exit when it is unprofitable

Characteristics of Perfect Competition (continued)

 4. Independent buyers and sellers 

This allows supply and demand to set the equilibrium price

Characteristics of Perfect Competition (continued)

 5. Well-informed buyers and sellers 

Buyers compare prices



Sellers know what consumers are willing to pay for goods

Price Taker

 When these 5 conditions are met, sellers become price takers—a business that accepts the market price determined by supply and demand

Imperfect Competition

 Market structures that lack one of the conditions needed for perfect competition are examples of imperfect competition 

This means there are only a few sellers and/or products are not standardized

 Examples: corn and beef markets

7-2: THE IMPACT OF MONOPOLY

Characteristics of a Monopoly

 Monopoly: a

market structure in which only one seller sells a product for which there are no close substitutes

 Pure monopolies are rare

Characteristics of a Monopoly (continued)

 A cartel is close to a monopoly  Cartel: a group of sellers that act

together to set prices and limit output

 Example: OPEC—11 nations hold more than 2/3 of the world ’ s oil reserves

Characteristics of a Monopoly (continued)

 A monopoly is a price maker—a

business that does not have to consider competitors when setting the price of its product

 Consumers accept the price of the product

Characteristics of a Monopoly (continued)

 Other firms struggle to enter the market due to a barrier to entry— something that stops the business from entering a market

3 Characteristics of Monopolies

 1. Only One Seller 

Supply of product has no close substitutes

3 Characteristics of Monopolies

 2. A Restricted, Regulated Market 

In some cases, government regulations allow a single firm to control a market (think utilities)

3 Characteristics of Monopolies

 3. Control of Prices 

Prices are controlled since there are no close substitutes

Types of Monopolies

 First, not all monopolies are harmful  Natural monopoly: occurs when the

costs of production are lowest with only one producer

Types of Monopolies (continued)

 Example of a natural monopoly= public utilities. It would be inefficient to have more than one a water company competing for customers.

 A single supplier would be most efficient according to economies of scale: when the average cost of

production falls as the producer grows larger

Types of Monopolies (continued)

 Government monopoly: exists

because the government wither owns and runs the business or authorizes only one producer

 Example: (U.S. Postal Service), DMV

Types of Monopolies (continued)

 Technological monopoly: occurs when

a firm controls a manufacturing method, an invention, or a type of technology

 Example: a patent, where an inventor has exclusive rights to that invention or process for a certain number of years

Types of Monopolies (continued)

 Geographic monopoly: exists when

there are no other producers within a certain region

 Example: professional sports teams

Businesses like Monopolies or more Market power

 Cartels  Mergers  Predatory Pricing – price below costs until competitors go out of business  Require a store to stock all of its products…

Government Promotes Competition

 1890 Sherman Anti-trust Act  Outlaws mergers and monopolies that limits trade between states  Companies broken up under the law  1911 Standard Oil and Trust  1982 AT&T

Microsoft…

 1997 accused of using near monopoly to take over operating system market  1999 Judge ruled against Microsoft.

 2001 deal – Microsoft can link Internet Explorer to their operating system, but can’t force computer companies to only provide Microsoft on new computers.

Government Promotes Competition…

 By preventing mergers  AOL and Time Warner – OK to merge  Libbey and Anchor Hocking – not allowed to merge  Degregulation  Some regulations reduce competition  Airlines, banking, trucking…  More competitors join

Questions

 1. Suppose that you went to a farmers ’ market and found several different farmers selling cucumbers. Would you be likely to find a wide range of prices for cucumbers? Why or why not?

 2. What would happen to a wheat farmer who tried to sell his wheat for $2.50 per bushel if the market price were $2.00 per bushel? Why?

 3. In 2003, 95% of the households on the U.S. had access to only 1 cable TV company in their area. What type of monopoly did cable TV companies have? Explain your answer.

 4. In 2002 the patent on the antihistamine Claritin expired. Using the 3 characteristics of a monopoly, explain what happened to the market for Claritin when the patent expired.