Chapter 7.1 Notes Market Structures
Perfect Competition • There are many buyers and sellers of similar products • Firms produce a standardized product of commodity. A commodity is a product that is identical across producers. • Example – bushel of wheat, coffee beans, corn, etc. • Firms can easily enter or leave the market • Buyers are fully informed about the product
Perfect Competition (CONT.) • A perfect competitive firm is so small relative to the size of the market that the firms choice about how to produce has no effect on the market price. d PRICE QUANTITY
Monopoly • A monopoly is opposite of perfect competition • From the Greek word meaning “one seller” • Monopoly has extreme market power – the ability to raise its prices without losing all sales to competitors.
Monopoly (CONT.) • Barriers to Entry – restrictions on the entry of new firms into a market. 1. Legal Restrictions - Sometimes entry to a market is illegal. Patents, regulations and the government sometimes provide legal protection against competition. Ex – bus and taxi services, electricity and cable t.v. (UBER is now challenging this) 2. Economies of Scale – A single firm can sometimes satisfy the market demand at a lower cost per unit than could two or more smaller firms.
3. control of essential resources – sometimes a country or a firm controls a critical resource used for production. • Ex – Alcoa controls most of the worlds supply of bauxite • Ex – the worlds diamond trade has been controlled by De Beers Consolidated Mines
4 types of Monopolies • Geographical monopoly – Your store is the only store producing a specific item in a small town. • Technological monopoly – Your business has superior technological advances than your competition. • Government monopoly – government control of business – ex – public education, electricity and cable companies • Natural monopoly – when monopolies form naturally.
Oligopoly • Two or three companies control the industry… • Example – Cereal companies • Kellogg, General Mills, Post (85%of all cereal is sold through these three)
Monopolistic Competition • - Closest model to our capitalistic system • These items sold are “like” or similar products • Entry into the market is easy. • Competition is fierce. • Example – Verizon, AT&T, Sprint, T-Mobile, Boost, Metro PCS