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Market Structure Summary TEST REVIEW

Market Structure Summary TEST REVIEW. Market Failures. Occur when the market fails to allocate resources efficiently. Examples of Market Failures Collusion or Price fixing Predatory pricing. T-Shirts. Without a market failure , when S = D, Social Welfare is maximized. Market Failures.

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Market Structure Summary TEST REVIEW

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  1. Market Structure SummaryTEST REVIEW

  2. Market Failures Occur when the market fails to allocate resources efficiently Examples of Market Failures • Collusion or Price fixing • Predatory pricing T-Shirts Without a market failure, when S = D, Social Welfare is maximized

  3. Market Failures • Collusion • Price Fixing • Predatory Pricing

  4. How close is the U.S. to Adam Smith’s World? No Competition • highest price • lowest quantity Pure Free Market • Lowest price • Highest quantity <============================================ Perfect Competition Monopolistic Competition Monopoly Oligopoly • How competitive is the U.S. Economy? • How close to “perfect competition” are we? • When is a market no longer “self regulating”? • Think market failures • How can the Gov’t improve the market outcome? • Can a company be too successfulor too big?

  5. Monopolistic Competition • Many firms produce goods that can be substitutes • product differentiation • Some characteristics of oligopoly & some of perfect competition Examples:Restaurants, Hair Salons, Auto Repair, Coffee Shops

  6. Monopolistic Competition Characteristics • Many Sellers • Differentiated Product [still substitutes] • RelativelyEasy to enter/leave industry • Reasonably complete information • Some price control Examples: Hair salons Pizza parlors Deli’s

  7. Monopolistic Competition Result • Short Run:Firm can earn an economic profit(or loss) • Long Run: Easy entry/exit forces economic profit to zero • Profit > Zero attracts new suppliers => forces price down • End Result: produces lowest price & highest quantity compared to all market structures except perfect competition

  8. Many Firms Type of Products? One Few Differentiated Identical (homogenous) firm firms products products Monopolistic Perfect Monopoly Oligopoly Competition Competition YES YES YES YES No No • Wheat • Tap water • Soft Drinks • Shoes Easy entry/exit causes new firms to enter driving profit to zero economic profit in L.R. • Electricity • Automobiles • Restaurants • Milk Yes Yes Number of Firms Structure Examples Short Run Economic Profit (or Loss) Long Run Economic Profit

  9. Practice Test

  10. D1 Perfect Competition in “Action” Entire Industry Individual Firm Sweatshirts Sweatshirts Price S1 Price S1 -------------- $35 $35 E1 E1 ------------- ------------- D1 Q1 100 Qty Qty

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