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Ch. 7: Market Structures. Section 1: Perfect Competition. Competition balances free markets, but certain requirements need to be met for perfect competition to exist. . Perfect Condition. Perfect competition requires the following… Many buyers and sellers participate

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section 1 perfect competition
Section 1: Perfect Competition
  • Competition balances free markets, but certain requirements need to be met for perfect competition to exist.
perfect condition
Perfect Condition
  • Perfect competition requires the following…
    • Many buyers and sellers participate
    • Sellers offer identical products
    • Buyers and sellers are well informed
    • Sellers are able to enter and exit the market freely/easily
1 many buyers and sellers
1. Many Buyers and Sellers
  • Having many producers and consumers creates choice, which brings down prices and improves products.
2 identical products
2. Identical Products
  • In perfect competition, producers are selling identical products.
  • Commodity- a product that is the same regardless of who produces it (gas, corn, milk)
3 informed buyers and sellers
3. Informed Buyers and Sellers
  • Consumers and producers need to be informed about products and pricing to ensure competition.
  • Internet has greatly advanced consumer information.
4 easy entry and exit
4. Easy Entry and Exit
  • Producers need to be able to easily enter the market for there to be many sellers.
  • How easy is it to start a business?
barriers to entry
Barriers to Entry
  • Barrier to entry: anything that causes difficulty to businesses trying to enter a market.
  • Excessive barriers to entry reduce the number of producers.
    • Start-up costs
    • Legal/certification requirements
barriers to entry1
Barriers to Entry
  • With your partner…
    • Consider to barriers to entry for your business.
    • List all start-up costs and legal requirements that you would need to overcome to create your business.
barriers to entry2
Barriers to Entry
  • High start-up costs and legal requirements make it difficult to enter the market.
  • America is ranked highly on the list of “ease in starting a business” list.
    • Limited number of legal “hoops”.
section 2 monopoly
Section 2: Monopoly
  • Monopolization eliminates competition entirely.
monopoly
Monopoly
  • A monopoly is a market that only has one supplier/producer.
  • Eliminates competition.
monopoly examples
Monopoly examples
  • With a partner, think of examples of markets with only one provider of the good/service.
how they form
How they form
  • Economies of scale: average cost per unit falls as production increases.
  • This makes big businesses more cost effective- enabling them to cut costs and absorb competitors.
john rockefeller standard oil
John Rockefeller: Standard Oil
  • Practiced horizontal consolidation.
andrew carnegie carnegie steel
Andrew Carnegie: Carnegie Steel
  • Practiced vertical consolidation.
natural monopoly
Natural Monopoly
  • An industry that operates most efficiently with just one provider.
    • Utilities: water, electric, natural gas
    • Roads
government monopoly
Government Monopoly
  • A monopoly created by the government.
    • Patents
    • Contracts
patents
Patents
  • A patent is a license given to an inventor that gives them exclusive rights to sell their product.
  • Good for a limited period of time.
contracts and franchising
Contracts and Franchising
  • Government often picks firms to make contracts with.
  • Company “X” is chosen to install and stock all school vending machines.
section 3 monopolistic competition
Section 3: Monopolistic Competition
  • Most markets are neither in perfect competition, nor monopolies, but somewhere in between.
monopolistic competition
Monopolistic Competition
  • Monopolistic competition is when many companies compete to sell products that are similar, but not identical.
monopolistic competition vs perfect competition
Monopolistic Competition vsPerfect Competition
  • Both have many competing firms/producers
  • Both have few barriers to entry
  • However…
    • Perfect Competition is a market with identical products (commodities).
    • Monopolistic Competition is a market with differentiated products (most consumer goods).
nonprice competition
Nonprice Competition
  • Monopolistic competitors can compete on factors other than price…
    • Physical characteristics
    • Location
    • Service level
    • Advertising, image, or status (popularity)
oligopoly
Oligopoly
  • Oligopoly is a market with only a few firms providing goods.
  • Occurs in markets with high barriers to entry.
    • Think: industries that would be realistically impossible for you to enter as a producer.
collusion
Collusion
  • Collusion is when members of oligopolies agree to set prices and production levels.
  • Collusion is illegal, because the effects are the same as a monopoly- elimination of competition.
cartels
Cartels
  • Cartels are organizations that form to coordinate prices and production.
  • Also illegal, and are often associated with the black market (drug cartel)
section 4 regulation and deregulation
Section 4: Regulation and Deregulation
  • Government attempts to balance two competing interests…
    • Open, accessible markets for producers
    • Protection for consumers
regulation vs deregulation
Regulation vs. Deregulation
  • Too much regulation can make it difficult for producers to enter markets (raises barriers to entry)
  • Too little regulation can create monopolies and predatory business practices that end up hurting consumers.
antitrust laws
Antitrust Laws
  • During the Industrial Revolution, many trusts were formed.
  • Trusts are like cartels and result in monopolization (Standard Oil Trust- Rockefeller)
  • Government eventually broke up these trusts.
mergers
Mergers
  • Mergers are when two or more companies combine into one.
  • Mergers are tightly regulated to avoid monopolization.
deregulation
Deregulation
  • During the 1970s and 1990s, Congress passed numerous laws to deregulate, citing increased inefficiencies as a result of the laws.
credit crisis 2007 present
Credit Crisis 2007-Present
  • Many cite deregulation of Wall Street investment banks as a cause of the banking collapse in 2007.
  • Lending was loosely regulated, and banks were able to knowingly make faulty loans.