Presentation Plus! Economics: Principles and Practices Copyright © by The McGraw-Hill Companies, Inc. Developed by FSCreations, Inc., Cincinnati, Ohio 45202 Send all inquiries.
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Presentation Plus! Economics: Principles and Practices Copyright © by The McGraw-Hill Companies, Inc. Developed by FSCreations, Inc., Cincinnati, Ohio 45202 Send all inquiries to: GLENCOE DIVISION Glencoe/McGraw-Hill 8787 Orion Place Columbus, Ohio 43240 Chapter 7 Market Structures CHAPTER INTRODUCTION SECTION 1 Competition and Market Structures SECTION 2 Market Failures SECTION 3 The Role of Government CHAPTER SUMMARY CHAPTER ASSESSMENT 3 Click a hyperlink to go to the corresponding section. Press the ESC key at any time to exit the presentation. Economics and You Why are some products available at competitive prices? Why are other products priced higher? In Chapter 7, you will learn about the various effects competition and market structures have on the prices you pay. Click the Speaker button to listen to Economics and You. 4 Chapter Objectives Section 1: Competition and Market Structures • Explain the characteristics of perfect competition. • Understand the nature of monopolistic competition. • Describe the behavior and characteristics of the oligopolist. • Identify several types of monopolies. 5 Click the mouse button or press the Space Bar to display the information. Chapter Objectives Section 2: Market Failures • Discuss the problems caused by inadequate competition. • Understand the importance of having adequate information. • Describe the nature of resource immobility. • Explain the nature of positive and negative externalities. 6 Click the mouse button or press the Space Bar to display the information. Chapter Objectives Section 3: The Role of Government • Discuss major antitrust legislation in the United States. • Understand the need for limited government regulation. • Explain the value of public disclosure. • Discuss the modifications to our free enterprise economy. 7 Click the mouse button or press the Space Bar to display the information. Click the mouse button to return to the Contents slide. Study Guide Main Idea Market structures include perfect competition, monopolistic competition, oligopoly, and monopoly. Reading Strategy Graphic Organizer As you read the section, complete a graphic organizer similar to the one on page 163 of your textbook by identifying five conditions that characterize perfectly competitive markets. 9 Click the mouse button or press the Space Bar to display the information. Section 1 begins on page 163 of your textbook. Study Guide (cont.) Key Terms – laissez-faire – collusion – market structure – price-fixing – perfect competition – monopoly – imperfect competition – natural monopoly – monopolistic competition – product differentiation – nonprice competition – oligopoly 10 – economies of scale – geographic monopoly – technological monopoly – government monopoly Click the mouse button or press the Space Bar to display the information. Section 1 begins on page 163 of your textbook. Study Guide (cont.) Objectives After studying this section, you will be able to: – Explain the characteristics of perfect competition. – Understand the nature of monopolistic competition. – Describe the behavior and characteristics of the oligopolist. – Identify several types of monopolies. Applying Economic Concepts Think of a popular brand of shoes or clothing. Why do sellers go to such lengths Click the Speaker button to to differentiate their products? listen to the Cover Story. 11 Click the mouse button or press the Space Bar to display the information. Section 1 begins on page 163 of your textbook. Introduction • When Adam Smith published An Inquiry into the Nature and Causes of the Wealth of Nations in 1776, the average factory was small, and business was competitive. • Laissez-faire, the philosophy that government should not interfere with commerce or trade, dominated Smith’s writing. • “Laissez-faire” is a French term that means “allow them to do.” 12 Click the mouse button or press the Space Bar to display the information. Introduction (cont.) • Under laissez-faire, the role of government is confined to protecting private property, enforcing contracts, settling disputes, and protecting businesses against increased competition from foreign goods. • By the late 1800s, however, competition was weakening. • As industries developed–industry meaning the supply side of the market or all producers collectively–the nature of competitive markets changed. 13 Click the mouse button or press the Space Bar to display the information. Introduction (cont.) • Today, economists classify markets according to conditions that prevail in them. • They ask questions such as: – – – – – How many buyers and suppliers are there? How large are they? Does either have any influence over price? How much competition exists between firms? What kind of product is involved–is everyone trading the exact same product, or are they simply similar? – Is it easy or difficult for new firms to enter the market? 14 Click the mouse button or press the Space Bar to display the information. Introduction (cont.) • The answers to these questions help determine market structure, or the nature and degree of competition among firms operating in the same industry. • Economists group industries into four different market structures–perfect competition, monopolistic competition, oligopoly, and monopoly. 15 Click the mouse button or press the Space Bar to display the information. Did You Know? • Advertising Age reported that Microsoft Corporation responded to the federal court’s 1999 ruling of its monopolistic power in the software industry by launching its largest advertising campaign, designed to portray the company’s humility, humanness, and humor. Microsoft wants its customers to know that the company “empathizes with the situations customers find themselves in,” especially in facing “the practical realities of the Internet.” 16 Click the mouse button or press the Space Bar to display the information. Perfect Competition • Perfect competition is when a large number of buyers and sellers exchange identical products under five conditions. – There should be a large number of buyers and sellers. – The products should be identical. – Buyers and sellers should act independently. – Buyers and sellers should be will-informed. – Buyers and sellers should be free to enter, conduct, or get out of business. 17 Click the mouse button or press the Space Bar to display the information. Perfect Competition (cont.) Figure 7.1 A Perfect Competition: Market Price and Profit Maximization 18 Click the mouse button or press the Space Bar to display the information. Perfect Competition (cont.) • Under perfect competition, supply and demand set the equilibrium price, and each firm sets a level of output that will maximize its profits at that price. • Imperfect competition refers to market structures that lack one or more of the five condition of perfect competition. 19 Click the mouse button or press the Space Bar to display the information. Perfect Competition (cont.) Figure 7.1 B Perfect Competition: Market Price and Profit Maximization 20 Click the mouse button or press the Space Bar to display the information. Discussion Question Imagine that your town had an open farmers’ market during the spring and summer. How would it meet each condition for a perfectly competitive market? 21 Click the mouse button or press the Space Bar to display the answer. Discussion Question Students should indicate that it would draw many buyers and sellers; the products would be farm-grown vegetables and fruits; prices would be set based on the week’s harvest (supply) and buyers’ demand; buyers examine and select products firsthand; and buyers may choose not to purchase and sellers may choose not to participate or not to offer all farm products. 22 Click the mouse button or press the Space Bar to display the answer. Monopolistic Competition • Monopolistic competition meets all conditions of perfect competition except for identical products. • Monopolistic competitors use product differentiation—the real or imagined differences between competing products in the same industry. 23 Click the mouse button or press the Space Bar to display the information. Monopolistic Competition • Monopolistic competitors use nonprice competition, the use of advertising, giveaways, or other promotional campaigns to differentiate their products from similar products in the market. • Monopolistic competitors sell within a narrow price range but try to raise the price within that range to achieve profit maximization. 24 Click the mouse button or press the Space Bar to display the information. Discussion Question What are some examples of how different jean companies differentiate their products? Answers will vary but may include style, available sizes, fabric, younger market, etc. 25 Click the mouse button or press the Space Bar to display the answer. Oligopoly • Oligopoly is a market structure in which a few very large sellers dominate the industry. • Oligopoly is further away from perfect competition (freest trade) than monopolistic competition. • Oligopolists act interdependently by lowering prices soon after the first seller announces the cut, but typically they prefer nonprice competition because their rival cannot respond as quickly. 26 Click the mouse button or press the Space Bar to display the information. Oligopoly (cont.) • Oligopolists may all agree formally to set prices, called collusion, which is illegal (because it restricts trade). • Two forms of collusion include: – price-fixing, which is agreeing to charge a set price that is often above market price – dividing up the market for guaranteed sales. 27 Click the mouse button or press the Space Bar to display the information. Oligopoly (cont.) • Oligopolists can engage in price wars, or a series of price cuts that can push prices lower than the cost of production for a short period of time. • Oligopolists’ final prices are likely to be higher than under monopolistic competition and much higher than under perfect competition. 28 Click the mouse button or press the Space Bar to display the information. Discussion Question Why do you suppose oligopolists rarely protest when a rival raises its prices? Answers will vary but students should imply that oligopolists know that a higher price by one of its competitors will eventually lead to its own higher profits. 29 Click the mouse button or press the Space Bar to display the answer. Monopoly • A monopoly is a market structure with only one seller of a particular product. • The United States has few monopolies because Americans prefer competitive trade, and technology competes with existing monopolies. • Natural monopoly occurs when a single firm produces a product or provides a service because it minimizes the overall costs (public utilities). • Geographic monopoly occurs when the location cannot support two or more such businesses (small town drugstore). 30 Click the mouse button or press the Space Bar to display the information. Monopoly (cont.) • Technological monopoly occurs when a producer has the exclusive right through patents or copyrights to produce or sell a particular product (an artist’s work for his lifetime plus 50 years). • Government monopoly occurs when the government provides products or services that private industry cannot adequately provide (uranium processing). • The monopolist is larger than a perfect competitor, allowing it to be the price maker versus the price taker. 31 Click the mouse button or press the Space Bar to display the information. Discussion Question Why are monopolies unappealing to Americans? Answers will vary, but students should indicate an understanding of the benefits of the free enterprise system and economic and social goals. 32 Click the mouse button or press the Space Bar to display the answer. Section Assessment Main Idea Describe the four basic market structures. Explain how they differ from one another. Answers will vary. Refer to pages 164 to 169 in your textbook to formulate your answer. 33 Click the mouse button or press the Space Bar to display the answer. Section Assessment (cont.) List the five characteristics of perfect competition. The five characteristics of perfect competition are: large number of buyers and sellers, deal in identical products, act independently, are well informed, and ease of entry into market. 34 Click the mouse button or press the Space Bar to display the answer. Section Assessment (cont.) Describe monopolistic competition. In monopolistic competition there are many competitors, a similar item or service, and entry into the market is easy. 35 Click the mouse button or press the Space Bar to display the answer. Section Assessment (cont.) Explain why the actions of one oligopolist affect others in the same industry. Others must follow to maintain market share. 36 Click the mouse button or press the Space Bar to display the answer. Section Assessment (cont.) Identify the types of monopolies. There are natural, geographic, technological, and government monopolies. 37 Click the mouse button or press the Space Bar to display the answer. Section Assessment (cont.) Synthesizing Information Provide at least two examples of oligopolies in the United States today. Some possible answers include the fast-food industry, the soft drink industry, and domestic airlines. 38 Click the mouse button or press the Space Bar to display the answer. Section Close Write a brief report on the role of competition in the American free enterprise economy. 39 Click the mouse button to return to the Contents slide. Study Guide Main Idea Inadequate competition, inadequate information, and immobile resources can result in market failures. Reading Strategy Graphic organizer As you read the section, think about why maintaining adequate competition is a worthwhile goal. Use a graphic organizer like the one on page 173 of your textbook to list the effects of competition. 41 Click the mouse button or press the Space Bar to display the information. Section 2 begins on page 173 of your textbook. Study Guide (cont.) Key Terms – market failure – externality – negative externality – positive externality – public goods 42 Click the mouse button or press the Space Bar to display the information. Section 2 begins on page 173 of your textbook. Study Guide (cont.) Objectives After studying this section, you will be able to: – Discuss the problems caused by inadequate competition. – Understand the importance of having adequate information. – Describe the nature of resource immobility. – Explain the nature of positive and negative externalities. Click the Speaker button to listen to the Cover Story. 43 Click the mouse button or press the Space Bar to display the information. Section 2 begins on page 173 of your textbook. Study Guide (cont.) Applying Economic Concepts Market Failure Have you ever felt that the perfect part-time job is waiting for you–but you just can’t seem to find it? If so, you are experiencing market failure. A market failure usually occurs when we don’t have adequate information about the market. The result is that productive resources–including you–do not reach their maximum potential. Section 2 begins on page 173 of your textbook. 44 Introduction • Markets sometimes fail. How they fail, and how the failures can be remedied, is a concern for economists. • A competitive free enterprise economy works best when four conditions are met. – Adequate competition must exist in all markets. – Buyers and sellers must be reasonably wellinformed about conditions and opportunities in these markets. – Resources must be free to move from one industry to another. – Finally, prices must reasonably reflect the costs of production, including the rewards to entrepreneurs. 45 Click the mouse button or press the Space Bar to display the information. Introduction (cont.) • Accordingly, a market failure can occur when any of these four conditions are significantly altered. • The most common market failures involve cases of inadequate competition, inadequate information, resource immobility, external economies, and public goods. • These failures occur on both the demand and supply sides of the market. 46 Click the mouse button or press the Space Bar to display the information. Did You Know? • Two VCR formats were once available to consumers. The first, Betamax, was introduced by Sony in1975 and had product features that surpassed the now dominant VHS format. By cutting back on advertising dollars the optimistic Sony allowed JVC, the company that engineered VHS, to gain control of the market. The demise of Betamax soon followed. 47 Click the mouse button or press the Space Bar to display the information. Inadequate Competition • Decreases in competition because of mergers and acquisitions can lead to several consequences that create market failures. • Inefficient resource allocation often results when there’s no incentive to use resources carefully. • Reduced output is one way that a monopoly can retain high prices by limiting supply. 48 Click the mouse button or press the Space Bar to display the information. Inadequate Competition (cont.) • A large business can exert its economic power over politics. • Market failures on the demand side are harder to correct than failures on the supply side. 49 Click the mouse button or press the Space Bar to display the information. Discussion Question Imagine you are on a city council and a leading auto manufacturer that employs thousands demands a reduced tax rate or it will relocate. What alternatives might be there be to granting or refusing the tax break? Students should recommend compromises that acknowledge the company’s economic power in the community yet save the taxpayers’ burden. 50 Click the mouse button or press the Space Bar to display the answer. Inadequate Information • Consumers, businesspeople, and government officials must be able to obtain market conditions easily and quickly. • If they cannot, it is an example of market failure. 51 Click the mouse button or press the Space Bar to display the information. Discussion Question What resources would you check to find out how the weather has affected the citrus industry this year? Answers will vary but may include annual reports of citrus growers in Florida and California, National Weather Service, U.S. Department of Agriculture reports, national news stations and newsmagazines, and agricultural journals. 52 Click the mouse button or press the Space Bar to display the answer. Resource Immobility • Resource immobility occurs when land, capital, labor, and entrepreneurs stay within a market where returns are slow and sometimes remain unemployed. • When resources will not or cannot move to a better market, the existing market does not always function efficiently. 53 Click the mouse button or press the Space Bar to display the information. Discussion Question What is unrealistic about the condition of resource mobility in an ideal free enterprise system? Answers will vary but students may indicate that resource mobility is an economic factor, and that people are also influenced by social and cultural concerns. 54 Click the mouse button or press the Space Bar to display the answer. Externalities • Externalities are unintended side effects that either benefit or harm a third party. • Negative externalities are harm, cost, or inconvenience suffered by a third party. • Positive externalities are benefits received by someone who had nothing to do with the activity that created the benefit. • Externalities are market failures because the market prices that buyers and sellers pay do not reflect the costs and/or the benefits of the action. 55 Click the mouse button or press the Space Bar to display the information. Discussion Question What is unrealistic about the condition of resource mobility in an ideal free enterprise system? Answers will vary but students may indicate that resource mobility is an economic factor, and that people are also influenced by social and cultural concerns. 56 Click the mouse button or press the Space Bar to display the answer. Public Goods • Public goods are products everyone consumes. • The market does not supply such goods because it produces only items that can be withheld if people refuse to pay for them; the need for public goods is a market failure. 57 Click the mouse button or press the Space Bar to display the information. Discussion Question Which of the four conditions of a competitive free enterprise economy does the need for public goods fail to meet? Reasonable pricing. 58 Click the mouse button or press the Space Bar to display the answer. Section Assessment Main Idea Using your notes from the graphic organizer activity on page 173, explain why maintaining adequate competition is a worthwhile goal. Without it, productive resources will not be allocated efficiently. 59 Click the mouse button or press the Space Bar to display the answer. Section Assessment (cont.) Define “adequate competition” in your own words and explain why markets need adequate competition. Adequate competition keeps one competitor from becoming too powerful. 60 Click the mouse button or press the Space Bar to display the answer. Section Assessment (cont.) Explain the importance of having adequate information. Without it, producers and consumers are unaware of products or services that would benefit them. 61 Click the mouse button or press the Space Bar to display the answer. Section Assessment (cont.) Explain why resources are not always mobile and willing to move. In the example of labor, people may be unable to sell homes, or are not willing to leave. 62 Click the mouse button or press the Space Bar to display the answer. Section Assessment (cont.) Describe the similarities and differences between positive and negative externalities. Both affect a third party. Positive: benefits; negative: harms, costs, and inconveniences 63 Click the mouse button or press the Space Bar to display the answer. Section Assessment (cont.) Understanding Cause and Effect Identify one possible positive externality and one possible negative externality from the closing of a military base. Possible answers: positive externality–bad traffic caused by the base may improve after the closing; negative externality–businesses near base might lose customers. 64 Click the mouse button or press the Space Bar to display the answer. Section Close Choose the one factor you believe is the most serious obstacle to efficient market competition and justify your choice in writing. 65 Click the mouse button to return to the Contents slide. Study Guide Main Idea One of the economic functions of government in a market economy is to maintain competition. Reading Strategy Graphic organizer As you read the section, give three reasons government takes part in economic affairs. Complete an organizer similar to the one on page 178 of your textbook to help you organize your answer. 67 Click the mouse button or press the Space Bar to display the information. Section 3 begins on page 178 of your textbook. Study Guide (cont.) Key Terms – trust – price discrimination – cease and desist order – public disclosure 68 Click the mouse button or press the Space Bar to display the information. Section 3 begins on page 178 of your textbook. Study Guide (cont.) Objectives After studying this section, you will be able to: – Discuss major antitrust legislation in the United States. – Understand the need for limited government regulation. – Explain the value of public disclosure. – Discuss the modifications to our free enterprise economy. Click the Speaker button to listen to the Cover Story. 69 Click the mouse button or press the Space Bar to display the information. Section 3 begins on page 178 of your textbook. Study Guide (cont.) Applying Economic Concepts Public Disclosure Do you have a credit card or a car loan? Do you know the size of the monthly payments, the computation of the interest, and other important terms of the agreement? Did someone take the time to explain all these details? Disclosing this information is not merely an act of kindness on the part of the business: it is required by a federal public disclosure law to assure that you are a well-informed consumer. 70 Introduction • Today, government has the power to encourage competition and to regulate monopolies that exist for the public welfare. • In some cases, government has taken over certain economic activities and runs them as government-owned monopolies. • In other cases, the United States government even makes estimates—in order to carry out its legal and social obligations. 71 Click the mouse button or press the Space Bar to display the information. Did You Know? • The Federal Trade Commission also regulates e-commerce. In 1999 it charged the owners of an Internet mall, which hosts sellers of various goods and services, with falsifying the earnings potential investors might make from their Internet-based business. Among the FTC rulings, the owners were barred for life from selling on any Internet-based business and barred for 10 years from selling franchises. 72 Click the mouse button or press the Space Bar to display the information. Antitrust Legislation • The antitrust laws prevent or break up monopolies, preventing market failures due to inadequate competition. • The Sherman Antitrust Act (1890) was the first U.S. law against monopolies. • The Clayton Antitrust Act (1914) outlawed price discrimination. 73 Click the mouse button or press the Space Bar to display the information. Antitrust Legislation • The Federal Trade Commission (1914) was empowered to issue cease and desist orders, requiring companies to stop unfair business practices. • The Robinson-Patman Act (1936) outlawed special discounts to some customers. 74 Click the mouse button or press the Space Bar to display the information. Antitrust Legislation (cont.) Figure 7.3 Anti-Monopoly Legislation 75 Discussion Question Why was the Federal Trade Commission necessary? No part of the government had the authority to enforce the antitrust laws until the FTC was created. 76 Click the mouse button or press the Space Bar to display the answer. Government Regulation • Government’s goal in regulating is to set the same level of price and service that would exist if a monopolistic business existed under competition. • The government uses the tax system to regulate businesses with negative externalities, preventing market failures. 77 Click the mouse button or press the Space Bar to display the information. Government Regulation (cont.) Figure 7.5 Effects of a Pollution Tax 78 Click the mouse button or press the Space Bar to display the information. Discussion Question Imagine you are the manager of the local cable television provider. You must speak to the city to gain approval for a rate increase. What would you say to persuade this regulatory body? Answers will vary but students should include ideas that address the public’s needs as well as the cable company’s needs. 79 Click the mouse button or press the Space Bar to display the answer. Public Disclosure • Public disclosure requires businesses to reveal information about their products or services to the public. • The purpose of public disclosure is to provide adequate information to prevent market failures. • Corporations, banks, and other lending institutions must disclose certain information. There are also “truth-inadvertising” laws that prevent sellers from making false claims about their products. 80 Click the mouse button or press the Space Bar to display the information. Discussion Question What are some examples of public disclosure? Ingredient labels of food products, financial and operating information to shareholders, and lending rates to consumers 81 Click the mouse button or press the Space Bar to display the answer. Indirect Disclosure • Indirect disclosure includes government’s support of the Internet and the availability of government documents on government Web sites. • Businesses post information about their own activities on their own Web sites. 82 Click the mouse button or press the Space Bar to display the information. Discussion Question How can consumers utilize the Internet before making a purchase? Talk to other consumers in chat rooms, participate in user forums, read product reviews before making a purchase. 83 Click the mouse button or press the Space Bar to display the answer. Modified Free Enterprise • Government intervenes in the economy to encourage competition, prevent monopolies, regulate industry, and fulfill the need for public goods. • Today’s U.S. economy is a mixture of different market structures, different kinds of business organizations, and varying degrees of government regulation. 84 Click the mouse button or press the Space Bar to display the information. Discussion Question How does government regulation help prevent businesses from seeking economic gain at the expense of other citizens. Answers will vary, but students should indicate an understanding of protecting individuals within the free enterprise system. 85 Click the mouse button or press the Space Bar to display the answer. Section Assessment Main Idea Using your notes from the graphic organizer activity on page 178, explain why the government is involved in economic affairs. The government is involved to encourage competition, regulate monopolies, and punish companies when they act in a manner that restrains competition. 86 Click the mouse button or press the Space Bar to display the answer. Section Assessment (cont.) Describe four important antitrust laws. Answers should include descriptions of the Sherman Antitrust Act (1890), the Clayton Antitrust Act (1914), the Federal Trade Commission Act (1914), and the Robinson-Patman Act (1936). 87 Click the mouse button or press the Space Bar to display the answer. Section Assessment (cont.) Explain why there is a need for limited government regulation within the economy. Government regulation is needed to prevent market failures due to negative externalities, and to regulate natural and government monopolies. 88 Click the mouse button or press the Space Bar to display the answer. Section Assessment (cont.) Describe the value of public disclosure. Public disclosure promotes competition and enables consumers to make informed decisions. 89 Click the mouse button or press the Space Bar to display the answer. Section Assessment (cont.) Explain why the United States has a modified free enterprise economy. People carry on economic affairs freely but are subject to some government regulation. 90 Click the mouse button or press the Space Bar to display the answer. Section Assessment (cont.) Synthesizing Information Identify five examples of how government has intervened in your community. Answers will vary. 91 Click the mouse button or press the Space Bar to display the answer. Section Close Explain whether you think “modified free enterprise” is an appropriate description of the American economic system. 92 Click the mouse button to return to the Contents slide. Section 1: Competition and Market Structures • Perfect competition is a market structure with a large numbers of buyers and sellers, identical economic products, independent action by buyers and sellers, reasonably well-informed participants, and freedom for firms to enter or leave the market. • Perfect competition is a largely theoretical situation used as a benchmark to evaluate other market structures. Market situations lacking one or more of these conditions are called imperfect competition. 94 Click the mouse button or press the Space Bar to display the information. Section 1: Competition and Market Structures (cont.) • Monopolistic competition has all the characteristics of perfect competition except for identical products. • Oligopoly is a market structure dominated by a few very large firms, and the actions by one affect the welfare of others. • The monopolist is a single producer with the most control over supply and price. Various forms of monopoly include the natural monopoly, the geographic monopoly, the technological monopoly, and the government monopoly. 95 Click the mouse button or press the Space Bar to display the information. Section 1: Competition and Market Structures (cont.) • All private firms, regardless of market structure, maximize profits by producing at the level of output where marginal cost is equal to marginal revenue. 96 Section 2: Market Failures • Market failures occur when sizable deviations from one or more of the conditions required for perfect competition take place. • Three of the five common market failures include inadequate competition, inadequate information, and resource immobility. • Externalities, or economic side effects to third parties, are a fourth market failure. A negative externality is a harmful side effect and a positive externality is a beneficial side effect. • Externalities are regarded as market failures because they are not reflected in the market prices of the activities that caused the side effects. 97 Click the mouse button or press the Space Bar to display the information. Section 2: Market Failures (cont.) • Finally, a market economy often fails to provide public goods such as national defense and public education because it cannot withhold supply from those who refuse to pay. 98 Section 3: The Role of Government • The Sherman Antitrust Act of 1890 was enacted to prohibit trusts, monopolies, and other arrangements that restrain competition. The Clayton Antitrust Act was passed in 1914 to outlaw price discrimination. The Robinson-Patman Act of 1936 was passed to strengthen the price discrimination provisions of the Clayton Antitrust Act. • Public disclosure is used as a tool to promote competition. Any corporation that sells its stock publicly is required to supply periodic financial reports to both its investors and to the SEC. • Banks are covered by additional disclosure laws and report to various federal agencies. 99 Click the mouse button or press the Space Bar to display the information. Section 3: The Role of Government (cont.) • Today, government takes part in economic affairs to promote and encourage competition. As a result, the modern economy is a mixture of different market structures, different forms of business organizations, and some degree of government regulation. 100 Click the mouse button to return to the Contents slide. Identifying Key Terms Use all the terms below in four paragraphs, with each paragraph describing one of the major types of market structures. collusion geographic monopoly imperfect competition monopolistic competition natural monopoly oligopoly product differentiation technological monopoly price-fixing monopoly nonprice competition perfect competition The Chapter Assessment is on pages 186–187. 102 Reviewing the Facts Describe the five characteristics of perfect competition. large number of buyers/sellers; buyers/sellers deal in identical products; buyers/sellers act independently; buyers/sellers are well informed; ease of entry into market 103 Click the mouse button or press the Space Bar to display the answer. Reviewing the Facts (cont.) Explain the main characteristics of the monopolistic competitor. competitor uses product differentiation, nonprice competition, price competition 104 Click the mouse button or press the Space Bar to display the answer. Reviewing the Facts (cont.) Contrast the oligopolist and the perfect competitor. oligopolist: few large competitors dealing in differentiated products may take actions that can change output, sales, and prices in the industry as a whole; perfect competitor: one of many producers dealing in identical products, and the actions he or she may take have no effect on prices 105 Click the mouse button or press the Space Bar to display the answer. Reviewing the Facts (cont.) Describe the four types of monopolies. natural: costs are minimized by having single producer; geographic: business has monopoly because of its geographic location; technological: firm or individual has discovered new manufacturing technique or has created something new; government: government owns and operates the business 106 Click the mouse button or press the Space Bar to display the answer. Reviewing the Facts (cont.) Explain what happens when markets do not have enough competition. Productive resources will not be allocated efficiently; prices may rise and output decrease. 107 Click the mouse button or press the Space Bar to display the answer. Reviewing the Facts (cont.) Provide two examples of inadequate information in a market. a lack of information about wages for the same job in different industries, or lack of information about returns on investments 108 Click the mouse button or press the Space Bar to display the answer. Reviewing the Facts (cont.) Explain what is meant by resource immobility. Resources are unable or unwilling to move to markets where returns are highest. 109 Click the mouse button or press the Space Bar to display the answer. Reviewing the Facts (cont.) Explain what is meant by positive and negative externalities. positive: economic action benefits uninvolved third party; negative: harms an uninvolved third party 110 Click the mouse button or press the Space Bar to display the answer. Reviewing the Facts (cont.) Account for the reluctance of the private sector to produce public goods. private sector only willing to produce items that can be withheld if people unwilling to pay 111 Click the mouse button or press the Space Bar to display the answer. Reviewing the Facts (cont.) Identify four major antitrust laws. Sherman Antitrust Act (1890); Clayton Antitrust Act (1914); Federal Trade Commission Act (1914); RobinsonPatman Act (1936) 112 Click the mouse button or press the Space Bar to display the answer. Reviewing the Facts (cont.) List 10 major federal government regulatory agencies. Answers will vary. 113 Click the mouse button or press the Space Bar to display the answer. Reviewing the Facts (cont.) Explain how public disclosure is used as a tool to prevent market failures. It requires businesses to provide information that helps prevent failures. 114 Click the mouse button or press the Space Bar to display the answer. Reviewing the Facts (cont.) Describe a modified free enterprise economy. economy in which people carry on their economic affairs freely, but are subject to government regulation in certain cases 115 Click the mouse button or press the Space Bar to display the answer. Thinking Critically Drawing Inferences Do you think there would be any advantages to making monopolies or near monopolies break up into smaller, competing firms? If so, what are they? If not, why would there not be? Use a chart like the one on page 186 of your textbook to help you organize the answers to these questions. Dividing monopolies would increase competition and prevent monopolies from taking advantage of consumers. Some monopolies are beneficial because they can operate more efficiently. 116 Click the mouse button or press the Space Bar to display the answer. Thinking Critically (cont.) Understanding Cause and Effect How are natural monopolies prevented from practicing monopolistic practices? Government regulations ensure that the natural monopoly sets the same level of price and service that would exist under competition. 117 Click the mouse button or press the Space Bar to display the answer. Thinking Critically (cont.) Making Generalizations To what extent do you think government should be involved in the free enterprise economy? Defend your answer. Answers will vary. 118 Click the mouse button or press the Space Bar to display the answer. Thinking Critically (cont.) Finding the Main Idea What problems do the Federal Trade Commission, the Securities and Exchange Commission, and the Consumer Product Safety Commission address? Answers will vary. 119 Click the mouse button or press the Space Bar to display the answer. Thinking Critically (cont.) Summarizing Information Why do private producers fail to provide public goods? It is difficult to get everyone to pay for their share of a public good. 120 Click the mouse button or press the Space Bar to display the answer. Applying Economic Skills Market Failures Explain how your newspaper, with its help-wanted ads and weekly sale prices, helps prevent market failures. by providing people with additional information on markets 121 Click the mouse button or press the Space Bar to display the answer. Applying Economic Skills (cont.) Market Structures Identify a fastfood product that you consume regularly. Count the number of firms in your community that supply a similar product, and then identify the market structure for that product in your community. Answers will vary. 122 Click the mouse button or press the Space Bar to display the answer. Applying Economic Skills (cont.) Free Enterprise How does the federal government attempt to preserve competition among business enterprises? federal regulation agencies, antitrust regulations, public disclosure, and individualized regulations 123 Click the mouse button or press the Space Bar to display the answer. Provide examples, other than those mentioned in the chapter, of industries that match, or closely match, each of the four forms of market structure. Examples will vary. 124 Click the mouse button or press the Space Bar to display the answer. Click the mouse button to return to the Contents slide. Continued on next slide. Continued on next slide. Continued on next slide. As you study this chapter, monitor newspapers and current events magazines to find stories about competition in the economy. Write summaries of three stories you locate. Explore online information about the topics introduced in this chapter. Click on the Connect button to launch your browser and go to the Economics: Principles and Practices Web site. At this site, you will find interactive activities, current events information, and Web sites correlated with the chapters and units in the textbook. When you finish exploring, exit the browser program to return to this presentation. If you experience difficulty connecting to the Web site, manually launch your Web browser and go to http://epp.glencoe.com/sec/socialstudies/economics/econ principles2005/index.php Explore online information about the topics introduced in this chapter. Click on the Connect button to launch your browser and go to the BusinessWeek Web site. At this site, you will find up-to-date information dealing with all aspects of economics. When you finish exploring, exit the browser program to return to this presentation. If you experience difficulty connecting to the Web site, manually launch your Web browser and go to http://www.businessweek.com The SEC The Securities and Exchange Commission (SEC) is a regulatory agency that is responsible for administering federal securities laws. The purpose of these laws is to protect investors from improper practices in securities markets and to ensure that they have access to disclosure of all material information concerning publicly traded securities. The commission also regulates firms engaged in the purchase or sale of securities, people who provide investment advice, and investment companies. Marketing in China Government Monopolies Click on a hyperlink to choose that topic. Marketing in China In addition to brand names, brand logos are significant in selling American products abroad. For example, the Coca-Cola logo is recognizable even when written in other alphabets, such as Arabic or Hebrew. The McDonald’s golden arches and Nike swoosh are other internationally known logos. Government Monopolies Some countries maintain monopolies over basic industries, such as production of oil, coal, and some manufactured goods. The Soviet Union had government monopolies in most industries. When it broke up in 1991, Russia, the largest remaining country, began to sell off some industries to private companies. International Price-Fixing OPEC, the Organization of Petroleum Exporting Countries, is an international oligopoly that tries to set world oil prices and to determine the amount of petroleum produced by its 11 member nations. Laissez-faire Monopoly Click on a hyperlink to choose that topic. The term laissez-faire originated with a group of eighteenth-century French economists who supported free trade. Their slogan, laissez faire, laissez passer (“let us alone, let us have free circulation of goods”) was adopted by Adam Smith to describe the principle of no government interference in the economy. The word monopoly has its origins in two Greek words–monos, meaning “alone” or “single,” and polein, meaning “to sell.” Business Info on the Internet The SEC (Securities and Exchange Commission) home page on the Internet offers a variety of information for investors as well as a place to list complaints. The SEC’s Web site (www.sec.gov) provides information for small businesses and individual investors, and lists current SEC rulings and information about enforcement of its rules. Cola Wars Coca-Cola and Pepsi are competing for control of the U.S. beverage market. The cola giants are experimenting with new marketing strategies in New York City, where the consumer market is considered one of the toughest in the country. Read the BusinessWeek Newsclip article on page 177 of your textbook. Learn more about the cola wars. Continued on next slide. This feature is found on page 177 of your textbook. Click the Speaker button to listen to an audio introduction. Cola Wars Finding the Main Idea Explain how the cola companies are trying to dominate the New York consumer markets. nonprice competition, such as better store displays, better store placement, promotions, giveaways, and sponsorships Continued on next slide. Click the mouse button or press the Space Bar to display the answer. This feature is found on page 177 of your textbook. Cola Wars Making Predictions What might you expect to happen to Pepsi and Coke prices as the companies try to dominate the New York City market? The price of both Pepsi and Coke could drop as the companies try to sway consumers. Click the mouse button or press the Space Bar to display the answer. This feature is found on page 177 of your textbook. Economics and You Video 8: Competition and Monopolies After viewing Competition and Monopolies, you should be able to: • Explain the effect of competition on the marketplace. • Compare and contrast monopoly and oligopoly. • Define merger. • Describe the government’s role in regulating competition. Continued on next slide. Click the mouse button or press the Space Bar to display the information. Economics and You Video 8: Competition and Monopolies Side 1 Disc 1 Chapter 8 Click the Videodisc button anytime throughout this section to play the complete video if you have a videodisc player attached to your computer. Click the Forward button to view the discussion questions and other related slides. Click inside the box to play the preview. Continued on next slide. Economics and You Video 8: Competition and Monopolies How is a monopoly different than an oligopoly? A monopoly exists when only one product or service exists; an oligopoly exists when only a few producers compete in a market. Side 1 Disc 1 Chapter 8 Click the mouse button or press the Space Bar to display the answer. Finding the Main Idea Finding the main idea will help you see the “big picture.” Organizing information will help you understand and assess the most important concepts. Continued on next slide. This feature is found on page 184 of your textbook. Finding the Main Idea Learning the Skill • To find the main idea, follow these steps: • Find out the setting of the article. • As you read the material, ask “What is the purpose of this article?” • Skim the material to identify its general subject. Look at headings and subheadings. Continued on next slide. Click the mouse button or press the Space Bar to display the information. This feature is found on page 184 of your textbook. Finding the Main Idea Learning the Skill (cont.) • Identify any details that support a larger idea or issue. • Identify the central issue. Ask “What part of the selection conveys the main idea?” Continued on next slide. This feature is found on page 184 of your textbook. Finding the Main Idea Practicing the Skill • Read the excerpt on page 184 of your textbook, then answer the questions on the following slides. Continued on next slide. This feature is found on page 184 of your textbook. Finding the Main Idea Who wrote this passage? Alice M. Rivlin Continued on next slide. Click the mouse button or press the Space Bar to display the answer. This feature is found on page 184 of your textbook. Finding the Main Idea When was it written? 1992 Continued on next slide. Click the mouse button or press the Space Bar to display the answer. This feature is found on page 184 of your textbook. Finding the Main Idea What was the purpose of this article? to persuade readers that growth is not a problem Continued on next slide. Click the mouse button or press the Space Bar to display the answer. This feature is found on page 184 of your textbook. Finding the Main Idea What is the main idea that the author of the article is expressing? Economic growth does not result in pollution. Continued on next slide. Click the mouse button or press the Space Bar to display the answer. This feature is found on page 184 of your textbook. Finding the Main Idea What additional details in the excerpt support the main idea? the “problem of the commons” and the benefits of economic growth Continued on next slide. Click the mouse button or press the Space Bar to display the answer. This feature is found on page 184 of your textbook. Finding the Main Idea Do you find the article persuasive? Explain your response. Answers will vary. Click the mouse button or press the Space Bar to display the answer. This feature is found on page 184 of your textbook. Charles Wang 1944– Click the picture to learn more about Charles Wang. Be prepared to answer the questions that appear on the next two slides. Continued on next slide. This feature is found on page 172 of your textbook. Charles Wang 1944– Identifying Cause and Effect What business strategy helped Wang’s fledgling company become successful? Wang, in order to avoid certain risks and speed products to market, purchased existing software firms and marketed their products. Continued on next slide. Click the mouse button or press the Space Bar to display the answer. This feature is found on page 172 of your textbook. Charles Wang 1944– Evaluating Information How important do you think Wang’s “Nerd Weekend” and similar activities are to his company’s success? Answers will vary. Click the mouse button or press the Space Bar to display the answer. This feature is found on page 172 of your textbook. End of Custom Shows WARNING! Do Not Remove This slide is intentionally blank and is set to auto-advance to end custom shows and return to the main presentation. Click the mouse button to return to the Contents slide.