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Chapter 7 market structure

Chapter 7 market structure. 7.1 Perfect Competition and Monopoly. Objectives- Distinguish the features of perfect competition. Describe the barriers to entry that can create a monopoly. Compare the market structures of monopoly and perfect competition in terms of efficiency.

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Chapter 7 market structure

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  1. Chapter 7market structure

  2. 7.1 Perfect Competition and Monopoly • Objectives- Distinguish the features of perfect competition. • Describe the barriers to entry that can create a monopoly. • Compare the market structures of monopoly and perfect competition in terms of efficiency.

  3. Perfect Competition • Market Structure- Important features of a market, including the number of buyers and sellers product uniformity across sellers, ease of entering the market, and forms of competition.

  4. Market Features • 1. Number of buyers- Are there many, only a few or just one? • 2. Products Uniformity- Do firms in the market supply identical products, or are products differentiated across firms.

  5. Market Structure • 3. Ease of buyers into the market- Can new firms enter easily or do natural or artificial barriers block them? • 4. Forms of competition among firms- Do firms compete based only on prices, or are advertising and product differences also important?

  6. Perfect Competition • Perfect Competition- A market structure with many fully informed buyers and sellers of an identical product and ease of entry. • Commodity- A product that is identical across sellers, such as a bushel of wheat. • EX- There is no “shopping” around for a cheaper bushel of a commodity. Works like a stock with price changes up and down.

  7. Monopoly • Monopoly- A sole supplier of a product with no close substitutes. Monopoly is a Greek word meaning “one seller”. • EX- If Coke was the only cola on the market, then they could charge any price they wanted for Cola.

  8. Monopoly • Market Power- The ability of a firm to raise its prices without losing all sales to rivals. • Barriers to Entry- Restrictions on the entry of new firms into an industry. • There are 3 types of entry barriers: Legal restrictions, economies of scale and essential resources.

  9. Barriers of Entry • Legal Restrictions- Companies that do not have patents, licenses and other legal restrictions can’t enter in the market. • EX- A T-shirt company just can’t put a UGA logo on a shirt and sell it. It has to buy the rights and get permission to use the logo in order to enter the market of college t-shirts.

  10. Barriers of Entry • Economies of Scale- When one business satisfies the market with lower than average cost per unit. • EX- Cherokee County Water- It is the only one in the county, but its prices are set and regulated by the county government. This is also called a natural monopoly. Also, an example of a natural monopoly is a grocery store out in the middle of the country.

  11. Barriers of Entry • Control of Essential Resources- Sometimes the source of monopoly power is a firm’s control over some resources critical to production. • China is the main supplier of Pandas. China is the only country to have Pandas so they control all the panda distribution of the world.

  12. Monopolies • Can a monopoly go broke? Yes- Pet Rock, the were the only ones to make it and have a patent on it. But, demand was there and the Pet Rock business went out of business due to lack of demand. • Are TRUE monopolies rare? Yes. There is always someone making a substitute close to the original product. • EX- Coke and Pepsi

  13. Monopoly vs. Perfect Competition • Competition forces business to be efficient. If a company is not, then the other company will get all the business because they are doing a better job with the services. • EX- Some people like Home Depot vs. Lowes because Home Depot has better in-store customer service.

  14. Is a Monopoly that bad? • Power or Water Company- Makes it easy to pick a company because they are the only ones offered. • Government Regulation- Government does not allow the power company to gouge anyone because the prices per unit are controlled by the government. • Companies will keep prices low to stop government regulation so the company will get all the money from the area it is servicing.

  15. 7.2 Monopolist Competition and Oligopoly • Objectives • Identify the features of Monopolistic competition. • Identify the features of Oligopoly and analyze firm behavior when these firms cooperate and when they compete.

  16. Monopolistic Competition • Monopolistic Competition- A market structure with low entry barriers and many firms selling products differentiated enough that each firm’s demand curve slopes downward. • Honda vs. Toyota- Cars are very similar, but differ enough that each company can control its prices and not go out of business.

  17. Product Differences • Physical Difference- The way they look. Some people like the look of a Civic over a Corolla. • Location- You can stay at a hotel anywhere, but would you rather stay at a hotel on the beach or a hotel in the middle of Kennesaw? • Services- Some restaurants deliver, some don’t. • Product Image- Celebrity influences. You may want to buy something because you heard it in a rap song.

  18. Oligopoly • Oligopoly- A market structure with a small number of firms whose behavior is interdependent. • Oligopoly is a Greek word meaning “few sellers” • Dell, Apple, Acer and E-Machine are examples of Oligopolies of computer companies. There are not many who produce computers.

  19. When Oligopolies Collude • Collude- Is when two companies try and set the same price in order for both companies to make money. • Cartel- A group of firms who act as one. • EX- OPEC is a group of oil companies who work together to set prices so all that are a member of OPEC make money. They do not try and eliminate competition.

  20. 7.3 Antitrust, Economic Regulation and Competition • Objectives: • Explain the goal of U.S. Antitrust Laws. • Distinguish between the two views of government regulation. • Discuss why U.S. markets have grown more competitive in recent decades.

  21. Antitrust • Antitrust Activity- Government efforts to prevent monopolies. • Antitrust Activities: • Promote the market structure that will lead to greater competition. Reduce anticompetitive behavior.

  22. Merger and Antitrust • Merger- The combination of two or more firms to form a single firm. • Southwest airlines is merging with AirTran. Why? • Deregulation- A reduction on government control over prices. Because the government allowed more airlines to exist, prices dropped and more people began to fly more often.

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