Perfect Competition

Perfect Competition In this lesson, students will identify characteristics of perfectly competitive markets. Students will be able to identify and/or define the following terms: Perfect Competition Commodities Barriers to Entry E. Napp

ESSENTIAL QUESTION • How does competition exert influence over an economy? E. Napp

Standards • Content Standard 4: The student will evaluate how changes in the level of competition in different markets affect prices. • 1. Explain how competition impacts the free market including the concepts that competition among sellers lowers costs and prices while encouraging increased production and competition among buyers increases prices and the allocation of goods and services to consumers willing and able to pay higher prices. • 2. Explain how people’s own self-interest, incentives and disincentives influence market decisions. E. Napp

A market is any venue where buyers and sellers meet. E. Napp

In a perfectly competitive market, a large number of firms produce the same product. E. Napp

Perfect Competition A perfectly competitive market has four conditions: • There are many buyers and sellers. • Sellers offer identical products. • Buyers and sellers are well-informed about their products. • Sellers are able to enter and exit the market freely. E. Napp

Markets for fruits and vegetables are usually perfectly competitive markets. E. Napp

Commodities • Commodities are generally sold in perfectly competitive markets. • A commodity is a product that is the same no matter who produces it. • Milk, petroleum, and apples are examples of commodities. E. Napp

Milk is milk. It is exactly the same regardless of who sells it. E. Napp

Barrier to Entry • A barrier to entry is any condition that makes it difficult to enter a market. • High start-up costs are barriers to entry. • A great degree of technical knowledge can also be a barrier to entry. E. Napp

If opening a new business requires hundreds of thousands of dollars, that high start-up cost is a barrier to entry. E. Napp

Needing a tremendous amount of technical knowledge is another example of a barrier to entry. E. Napp

Growing corn doesn’t require a tremendous amount of money or knowledge. E. Napp

Opening a commercial airline industry requires a tremendous amount of capital. E. Napp

Few markets are perfectly competitive. Products must be identical in a perfectly competitive market. E. Napp

Monopoly In this lesson, students will be able to identify characteristics of a monopoly. Students will be able to identify and/or define the following terms: Monopoly Natural Monopoly Patent E. Napp

A monopoly is a market dominated by a single seller. E. Napp

Monopoly • A monopoly is a market dominated by a single seller. • In general, monopolies are illegal. • Monopolies lead to higher prices, inferior quality of products, and reduced supply. E. Napp

Monopolies can lead to higher prices. Monopolies do not benefit consumers. E. Napp

Antitrust Laws • The government generally prevents monopolies from forming or breaks up existing monopolies. • Antitrust laws are laws that prevent the formation and continuation of monopolies. • The government recognizes that monopolies do not benefit consumers. E. Napp

The government carefully watches market activity and prevents the formation of most monopolies. E. Napp

Natural Monopolies • However, the government does allow the formation of some monopolies. • A natural monopoly occurs when a market runs most efficiently with one firm supplying all of the output. • An example of a natural monopoly is public water. E. Napp

Rather than building an overlapping network of pipes, one company serves customers best. E. Napp

Patents • A patent also provides a supplier with monopoly power. • A patent is a license given to the inventor of a product to be the sole supplier of the product for a number of years. • A patent is an incentive for invention. E. Napp

Nextel had a patent for a number of years on one of its phone features. E. Napp

The Market Spectrum • Perfect competition is vastly different than a monopoly. • In perfect competition, many sellers sell identical products. • In a monopoly, a single seller is the sole supplier. E. Napp

The old monopolies have been broken up. E. Napp

The phone company was once a natural monopoly. The government has since deregulated it. E. Napp

The market for jeans is an example of monopolistic competition. E. Napp

Monopolistic Competition • Monopolistic competition is a market structure in which many companies sell similar but not identical products. • Monopolistically competitive firms sell products that are similar enough to be substituted. • Levi jeans can easily be substituted for Lee jeans. E. Napp

One of these brands could easily be substituted for the other brand. E. Napp

Differentiation • Differentiation occurs when a good is produced slightly differently from another good. • In monopolistic competition, differentiation is critical. • Products are similar but not identical. The not identical part allows for a slightly higher price but just slightly higher. E. Napp

Nonprice competition is using something other than price to attract customers. Convenience is an example. E. Napp

Nonprice Competition • Nonprice competition is using something other than price to attract customers. • Style, location, and service are examples of nonprice competition. • Nonprice competition can help businesses attract customers. E. Napp

Some markets are oligopolies. An oligopoly is a market dominated by a few sellers. E. Napp

Oligopoly • An oligopoly is a market in which a few large firms dominate a market. • Usually, the four largest firms produce at least 70 to 80 percent of the market’s output. • The government closely monitors oligopolies. E. Napp

Barriers to entry can lead to oligopolies. High start-up costs can lead to oligopolies. E. Napp

The government closely monitors oligopolies because a market dominated by a few sellers could act like a monopoly! E. Napp

Perfect Competition Monopolistic Competition Oligopoly Monopoly The Four Different Market Structures E. Napp

It is important to remember that competition benefits consumers. E. Napp

Perfect Competition