Transcript Chapter 7, Section 1

Chapter 7
Section 1
Perfect Competition
Key Terms and Definitions
Perfect competition- a market structure in which a large
number of firms all produce the same product.
Commodity- a product that is the same no matter who
produces it, such as petroleum, notebook paper, or milk.
Barrier to entry- any factor that makes it difficult for a
new firm to enter a market.
Imperfect competition- a market structure that does
not meet the conditions of perfect competition.
Start-up cost- the expenses a firm must pay
before it can begin to produce and sell goods.
Perfect Competition
1) Need to have many Buyers & Sellers
2) Sellers offer identical products
3) Buyers & Sellers are
well informed about products
4) Sellers are able to enter and exit the market freely
Imperfect Competition
Barriers to entry- are factors that make it difficult for
new firms to enter a market.
1) Start-up Costs- The expenses that a new business
must pay before the first product reaches the customer.
What sort of costs are there?
2)Technology or Knowledge: Do you
understand the process by which your
goods or services are produced?
Commodity
• A product that is the same no matter who produces
it, such as petroleum, notebook paper, produce, or
perhaps milk.
• Understand that there are, for instance, different
kinds of milk, but generally we buy milk not by
brand but by price.
Chapter 7
Section 2- Monopoly
• Monopoly- a market dominated by a single seller (p. 156)
• Economies of Scale- factors that cause a producer's
average cost per unit to fall as output rises (p. 157)
• Natural Monopoly- a market that runs most efficiently
when one large firm supplies all of the output (p. 158)
• Government Monopoly- a monopoly created by the
government (p. 159)
Chapter 7
Section 2 – Monopoly (cont’d)
• Patent- a license that gives the inventor of a new product the
exclusive right to sell it for a certain period of time (p.159)
• Franchise- the right to sell a good or service within an
exclusive market (p. 159)
• License- a government-issued right to operate a business (p.159)
• Price Discrimination- division of customers into groups based
on how much they will pay for a good (p. 163)
• Market Power- the ability of a company to change prices and
output like a monopolist (p. 163)
Chapter Seven
Section 3
Monopolistic Competition
and Oligopoly
Monopolistic Competition
• A market structure in which many
companies compete to sell similar
but not identical items.
• Goods are similar enough to be
substituted for each other, but are
all individually different.
Four Conditions
Four conditions of monopolistic competition:
Many Firms
Few Artificial Barriers To Entry
Slight Control Over Price
Differentiated Products
Many Firms
• not marked by economies of scale or high
start-up costs.
• firms can start selling goods and earning
money after a small initial investment
• new firms spring up quickly to join the
market.
Few Artificial Barriers To Entry
• Patents do not protect anyone from competition, either
because they expired or because each firm sells a
product that is distinct enough to fall outside the zone
of patent protection.
• Just like perfect competition, monopolistically
competitive markets include so many competing firms
that competitors cannot work together to keep out new
competitors.
Slight Control Over Price
• Have some freedom to raise and lower their prices
because each firm’s goods are a little different
• some people are willing to pay more for the difference.
• monopolistically competitive market firm has only little
control over it’s prices.
• Customers will substitute another manufacturer’s
products if the prices get too high.
Differentiated Products
• Firms have some control over selling price because they
can differentiate, or distinguish, their goods from the
other products.
• The main difference between perfect competition and
monopolistic competition is differentiation
• monopolistically competitive seller profits from
differences between his or her products & competitors
products.
Non-Price Competition
Characteristics of Non-Price Competition:
Physical Characteristics
Location
Service Level
Advertising, Image, Or Status
Oligopoly
• A market dominated by a few large, profitable
firms.
• Oligopolies usually occur if four largest firms
produce 70 to 80 percent of all the output.
• They may set higher prices, lower output
• They may help create barriers to entry
Oligopoly- Problems
• Cooperation
– Price war - a series of competitive price cuts that lowers the
market price below the cost of production (p. 171)
– Price Fixing- an agreement among firms to charge one price
for the same good (p.171)
• Collusion
– an agreement among firms to divide the market, set prices, or
limit production (p. 1 71)
• Cartels
– a formal organization of producers that agree to coordinate
prices and production (p. 171)
Comparisons
Perfect
Competition
Monopolistic
Competition
Oligopoly
Monopoly
Number of
Firms
Many
Many
A Few
One
Variety of
Goods
None
Some
Some
None
Price Control
None
Little
Some
Complete
Barriers to
Entry
None
Low
High
Complete
Wheat,
Stock
Jeans,
Books
Cars
Public
Water
Examples
Chapter Seven
Section 4
• Predatory pricing -selling below cost to drive competitors out of
the market.
• Antitrust laws -laws that encourage competition in the marketplace.
• Trust -like a cartel, an illegal grouping of companies that
discourages competition.
•
Merger -combination of two or more companies into a single firm.
• Deregulation -the removal of some government controls over a
market
The Sherman Antitrust Act
The Sherman antitrust act was one way the
government tried to regulate big business. This
act was passed in 1890 but was not enforced
until Theodore Roosevelt took up office in 1901.
This law outlaws mergers and monopolies that
restrain trade between states.
The Clayton Antitrust Act
Outlaws practices that limit competition or lead to
monopoly.
This law was passed in 1914 & helped to expand
government control of big business.
The Robinson-Patman Act
The Robinson-Patman act defines & outlaws
several forms of price discrimination.
Celler-Kefauver Act
The Celler-Kefauver act allows government to
stop mergers that could hurt competition.
Examples of government
intervention:
1) (1974) department of justice sues to end AT&T’s
monopoly over local phone service
2) AT&T agrees to break up its local phone service
into several companies.
3) In 1999 a federal judge finds that Microsoft is a
monopoly.