Economics Chapter 7 Market Structures

1. EconomicsChapter 7Market Structures Section 1 and 2 Perfect Competition and Monopoly

2. Perfect Competition • Also called pure competition (the simplest form of market structure) • A market in which a large number of firms all produce essentially the same product and no single seller controls supply or prices. • 4 Conditions of Perfect Competition • Many buyers and sellers participate in the market • Sellers offer identical products (commodities) • Buyers and sellers are well informed about products • Sellers are able to enter and exit the market freely.

3. Imperfect Competition • A market structure that fails to meet the conditions of perfect competition. • These include barriers to entry (make it difficult to enter a new market) • 2 Examples of Barriers to Entry • Start-Up Costs (the expenses a new business must pay before it can begin to produce and sell goods). High costs (don’t join), Low costs (easier to join) • Technology. The need to have an understanding or know how to use technical skills to start a business and make it successful. Lack of these skills can hold back the development of a business.

4. Perfect Competition • Most efficient market system. • Firms must use all land, labor, and capital to their best advantage. • Therefore prices are driven by competition (try to keep prices and production costs low). Prices will therefore be the lowest sustainable prices possible. • Output will reach the point where each supplying firm just covers all of its costs.

5. Monopoly • A market in which a single seller dominates or controls the entire market. This means having control over price and output (usually raise price). • 3 Characteristics of Monopolies: • Single Seller (1 firm or company or producer) • Barriers to Entry (hard for other firms to enter) • Supply a Unique Product (the good or service provided has no close substitutes – 1 fast food restaurant for the next 50 miles at a rest stop) • The US has outlawed some monopolistic practices

6. Economies of Scale • Factors that cause a producer’s average cost per unit to fall as output rises. • Graph on pg 165 (look at Figure 7.2) • Most businesses don’t have economies of scale (as you produce more, total costs get lower until a certain point, then it costs more to produce) • Economies of scale, the firm always becomes more efficient. As output increases, the fixed costs can be spread over more units (bigger is better)

7. Natural Monopolies • A market that runs most efficiently when one large firm supplies all of the output. If a second firm enters, prices will drop so low that one of the firms will go out of business. • Public water is a good example (electricity too) • Cable and phone at one time was a natural monopoly (no more) • Government usually allows 1 firm in an area to have a monopoly but gov’t can also control prices that are charged for the service. • Technology can destroy natural monopolies. Telephone companies don’t need wires anymore (cell phones) therefore other companies can compete without putting up new lines.

8. Government Monopolies • A monopoly created by the government • The government can give a company monopoly power but issuing a patent (exclusive rights to sell a new good or service for a specific period of time – 20 yrs) • Franchises: a contract issued by a local authority that gives a single firm the right to sell its goods within an exclusive market (THS contracts out Coke products) • License: grants firms the right to operate a business where scarce resources are involved (land, tv and radio broadcasts) • Government can restrict the number of firms in a market (Major League Baseball restricts the # of teams)

9. Price Discrimination • Monopolies usually charge the same price to everyone. However, monopolies may be able to divide consumers into two or more groups and charge a different price to each group • Based on the idea that each customer has a max price that they will pay for a good. • Set at a high price (only certain people can afford it), slowly lower the price so that others can afford. • This can be practiced by any company with market power (ability to control prices and total market output)

10. Targeted Discounts • Firms divide consumers into large groups and design pricing policies for each group. • Discounted Fares: buy in advance, buy on certain days. • Rebates: refund a small portion of the purchase to buyers who will fill out rebate forms. • Senior or Student Discounts: Retirees and students have lower incomes therefore get discounted prices • Children Free: Families spend much of their income on kids, therefore, kids are free.