7-1: WHAT IS PERFECT COMPETITION?. Competition Economists classify markets based on how competitive...
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Transcript of 7-1: WHAT IS PERFECT COMPETITION?. Competition Economists classify markets based on how competitive...
7-1: WHAT IS PERFECT COMPETITION?
Competition
Economists classify markets based on how competitive they are
Market structure: an economic model of competition among businesses in the same industry
Perfect Competition
Definition: ideal model of a market economy Perfect
competition is used as a basis to determine how competitive a market is
5 Characteristics of Perfect Competition
1. Numerous buyers and sellers This ensures
that no single buyer or seller has the power to control the price in the market
5 Characteristics of Perfect Competition (continued)
Buyers have lots of optionsSellers are able to sell their products at market price
2. Standardized product A product that
consumers see as identical regardless of the producerExample: milk,
eggs, etc.
Characteristics of Perfect Competition (continued)
3. Freedom to enter and exit markets Producers enter the market when
it is profitable and exit when it is unprofitable
Characteristics of Perfect Competition (continued)
4. Independent buyers and sellers This allows
supply and demand to set the equilibrium price
Characteristics of Perfect Competition (continued)
5. Well-informed buyers and sellers Buyers compare prices Sellers know what consumers are
willing to pay for goods
Price Taker
When these 5 conditions are met, sellers become price takers—a business that accepts the market price determined by supply and demand
Imperfect Competition
Market structures that lack one of the conditions needed for perfect competition are examples of imperfect competition This means there are only a few
sellers and/or products are not standardizedExamples: corn and beef markets
7-2: THE IMPACT OF MONOPOLY
Characteristics of a Monopoly
Monopoly: a market structure in which only one seller sells a product for which there are no close substitutes Pure monopolies
are rare
Characteristics of a Monopoly (continued)
A cartel is close to a monopoly Cartel: a group of sellers that act
together to set prices and limit output
Example: OPEC—11 nations hold more than 2/3 of the world’s oil reserves
Characteristics of a Monopoly (continued)
A monopoly is a price maker—a business that does not have to consider competitors when setting the price of its product Consumers accept the price of the
product
Characteristics of a Monopoly (continued)
Other firms struggle to enter the market due to a barrier to entry—something that stops the business from entering a market
3 Characteristics of Monopolies
1. Only One Seller Supply of
product has no close substitutes
3 Characteristics of Monopolies
2. A Restricted, Regulated Market In some cases, government
regulations allow a single firm to control a market (think utilities)
3 Characteristics of Monopolies
3. Control of Prices Prices are
controlled since there are no close substitutes
Types of Monopolies
First, not all monopolies are harmful
Natural monopoly: occurs when the costs of production are lowest with only one producer
Types of Monopolies (continued)
Example of a natural monopoly= public utilities. It would be inefficient to have more than one a water company competing for customers. A single supplier would be most
efficient according to economies of scale: when the average cost of production falls as the producer grows larger
Types of Monopolies (continued)
Government monopoly: exists because the government wither owns and runs the business or authorizes only one producer Example: U.S. Postal Service
Types of Monopolies (continued)
Technological monopoly: occurs when a firm controls a manufacturing method, an invention, or a type of technology Example: a patent, where an inventor
has exclusive rights to that invention or process for a certain number of years
Types of Monopolies (continued)
Geographic monopoly: exists when there are no other producers within a certain region
Example: professional sports teams
Questions
1. Suppose that you went to a farmers’ market and found several different farmers selling cucumbers. Would you be likely to find a wide range of prices for cucumbers? Why or why not?
2. What would happen to a wheat farmer who tried to sell his wheat for $2.50 per bushel if the market price were $2.00 per bushel? Why?
3. In 2003, 95% of the households on the U.S. had access to only 1 cable TV company in their area. What type of monopoly did cable TV companies have? Explain your answer.
4. In 2002 the patent on the antihistamine Claritin expired. Using the 3 characteristics of a monopoly, explain what happened to the market for Claritin when the patent expired.