As a result of the laws and forces of supply and demand, unique market structures develop in response. Finally as a response to the market structures created by supply and demand, the government in turn responds to these structures.
Perfect Competition • A market structure is a model that allows economists to observe competition within an industry. • Perfect Competition is the ideal form of a market economy. It has five characteristics. • 1. Numerous Buyers and Sellers • 2. Standardized Product • 3. Freedom to enter and exit markets (free enterprise) • 4. Independent Buyers and Sellers (cannot influence price) • 5. Well-informed Buyers and Sellers (comparison)
Monopolies • A Monopoly is a market structure with only one seller and thus is the least competitive. Controls SUPPLY. • Cartels work together to set prices so they act as a monopoly. • Other firms face large barriers to entry which make it hard for a new business to enter the market. • 3 Characteristics • 1. Only one seller • 2. A restricted and regulated market • 3. Control of prices.
Types of Monopolies • 1. Natural Monopoly: A market situation in which the costs of production are lowest when on firm provides output. (example: water company) • 2. Government Monopoly: The government own or authorizes only one producer. (example: postal service) • 3. Technological Monopoly: Exists because a business controls a particular manufacturing method. (example: polaroid) • 4. Geographic Monopoly: Exists because no other like producers exist in a region. (example: professional sports)
Other Market Structures: Competitive Monopolies • Monopolistic Competition: Occurs when many sellers offer similar, but not standarized products. (example: T-Shirt Companies) • Business try to gain buyers and control over the industry through product differentiation and nonprice competition (features other than price). • Many Sellers and Many Buyers • Similar but differentiated products • Limited control of prices • Freedom to enter and leave market
Other Market Structures: Oligopoly • Oligopoly is a market structure in which only a few sellers offer a similar product. Each company has market share of the industry and one of the reasons there are few businesses in the industry is due to high start-up costs. • Few Sellers and Many Buyers • Standarized or Differentiated Products • More control of prices • Little freedom to enter or leave the market
Government Response Regulation and Deregulation Policies
Key Concepts: Regulation • Regulation is a set of rules or laws designed to control business behavior. • A trust is a group of firms combined in order to reduce competition in an industry. • Antitrust Legislation defines monopolies and gives government the power to control them. • A merger is the joining of two firms to form a single firm.
Regulation: Two Purposes Ensure a level playing field Protecting consumers • Price fixing occurs when businesses agree to set prices for competing products (regulation fights this) • Market Allocation occurs when competing businesses divide a market amongst themselves (antitrust fights this) • Predatory Pricing occurs when businesses set prices below cost for a time to drive competitors out of the market. • A cease and desist order requires a firm to stop an unfair business practice. • Public disclosure is a policy that requires businesses to reveal product information. • Consumer Protection Agencies such as the FDA, EPA, and FCC assist in enforcing these policies and regulations.
Deregulation • Deregulation reduces or removes government control of business. • Example: The Airline Deregulation Act of 1978. By removing all government control of airline routes and rates, the industry grew and new firms entered the field. Air travel increased as prices lowered with firms competing with one another. • The con to this was that quality of service declined as airlines tried to reduce costs to make up for lower ticket fares.