CHAPTER 7: MARKET STRUCTURESS1: Perfect Competition

S2: Monopoly

S3: Monopolistic Competition and Oligopoly

S4: Regulation and Deregulation

BELL WORK

Grab workbook pages 3 hole punch and put in folder

Answer the Ch. 7 Warmup A-C

S1: MARKET STRUCTURES

“What are the characteristics of Perfect competition?”

Objectives 4 conditions of a perfectly competitive market 2 common barriers that prevent firms from entry Prices/output in perfectly competitive market

Key terms http://www.pearsonsuccessnet.com/snpapp/iText/products/0-13-3

69833-5/Flash/Ch07/Econ_OnlineLectureNotes_ch7_s1.swf

INTRODUCTION

Characteristics of perfect competition? Many buyers/sellers Identical products Informed buyers/sellers Free market entry/exit

PERFECT COMPETITION

Simplest market structure Also called pure competition

Perfectly Competitive Market: Large # of firms Firms producing same products Assumes market is in equilibrium Assumes firms sell same product at same price

CONDITIONS OF PERFECT COMPETITION

Only few perfectly competitive markets Tough b/c markets must meet 4 strict

conditions Many buyers/sellers participating in market

No 1 person/firm can be too powerful so to influence total market qty. or price

Sellers offering identical products No difference in products sold: gas, paper, sugar.

Buyers/sellers well-informed about products Market provides plenty of info to buyers. Understand

features, price, and other info about product Sellers are able to enter/exit market freely

Very easy to enter/exit a perfect market Entrance when popular; exit when demand decreases

BARRIERS TO ENTRY

Barriers lead to imperfect competition Barriers can include:

Start-up costs: When start-up costs are high it is more difficult for new

firms to enter market Markets w/high start-up costs are less likely to be

perfectly competitive. Technology

Markets that require high degree of technical knowledge can be difficult to enter into w/out preparation and stu

PRICE AND OUTPUT

Perfectly competitive markets are efficient and competition keeps both prices/production costs low. Prices (in PC Market) correctly represent the

opportunity costs of each product Also provide the lowest sustainable prices

possible. Output

B/c of PC Market, no supplier can greatly influence prices. Producers make their decisions based on most efficient use of resources.

LESSON CLOSING

Pearsson Resources Visual Glossary Action Graph: Market Equilibrium

“Exit Pass” Critical Thinking; 8-10

Also have answers for tomorrow

Workbook Work Chapter Work pgs. 57 and 131 Identifying Perfect Competition worksheet

7.2: MONOPOLYBW: Refresh self on Critical thinking 8-10 pg. 163

Finish workbook work….

CRITICAL THINKING

1. Which markets are close to Perfect competition1. Paper clips and white socks

2. Commodities?1. Products same regardless of producer

3. Why must PC markets always deal in commodities?1. Products must be identical, buyers will not pay more for

one producers good

4. What would happen today?1. Buyers would make decisions based on differences b/t

products

5. Barriers to entry1. Factors that make it difficult to enter a market

6. 2 other specific examples1. Difficulty in finding raw materials, difficulty in finding

workers

7.2: MARKET STRUCTURES

“Characteristics of a monopoly?” Objectives

Characteristics/examples of a monopoly How monopolies, including govt., are formed How firm w/monopoly makes output decisions Why monopolists sometimes practice price

discriminations Key Terms

http://www.pearsonsuccessnet.com/snpapp/iText/products/0-13-369833-5/Flash/Ch07/Econ_OnlineLectureNotes_ch7_s2.swf

INTRODUCTION

What are characteristics of a Monopoly? Single Seller Many barriers

to entry for new firm

No variety of goods

Complete control of price

CHARACTERISTICS OF A MONOPOLY

Characteristics Single seller in market Many barriers to entry Supply unique product w/no close substitute

Having market cornered Change high prices Quantity of goods lower than in competitive

market

FORMING A MONOPOLY

Economies of Scale Different market conditions create different types of

economies Some monopolies enjoy this

Characteristics that cause a producers av. Cost to drop as production rises

Natural Monopolies Market that runs most efficiently when one large firm

provides output Public water is an example

If it wasn’t a natural we would use too much, and be inefficient

Technology can destroy a natural monopoly. Read pg.166 Can cut fixed costs to make small companies compete

w/large firms

FORMING A MONOPOLY

Govt. actions that lead to monopolies Issuing a patent: gives exclusive rights to sell

good/service Granting a franchise: gives single firm right to

sell its goods w/in an exclusive market Issuing a license- allows firms to operate a

business, especially where scarce resources are involved

Restricting number of firms in a market

OUTPUT DECISIONS:

Monopolists Dilemma: Choose PRICE or OUTPUT They think BIG PICTURE to maximize profits

Produce fewer goods @ higher prices Can be viewed in terms of demand

Buyers will demand more of a good @ lower prices BUT the more a monopolist produces, the less they will

receive in profits.

Falling Marginal Revenue Key difference in PCs and Monopolies

PCs marg. Rev.= price, each firm receives same price no matter production

Not true for monopolies

OUTPUT DECISIONS:

Setting a Price Marginal revenue is lower than market price in

monopolies Setting a Price Action Graph Question: Where does a monopolist usually

set output and price compared to PC market? Monopolist sets output lower and price higher

than seller in a PC market

PRICE DISCRIMINATION

Many cases the monopolist charges the same price to all customers

Some instances they don’t: Called Price Discrimination Idea that each costumer has a maximum price that

he/she will pay for a good Targeted Discounts: targeting particular groups

Discounted airline fares Senior citizens/students Children promotion

Limits: must me 3 conditions Firms must have market power Customers divided into distinct groups Buys must not be in a position in which they can easily

resell good/service.

LESSON CLOSING

Pearsson Success Economies of scale graph Setting a price action Graph Demand schedule for Breathedeep Graph Case Study: Book/Video Monopoly: Chart Skills

“Exit Pass” Critical Thinking 8-11

BELL WORKFinish Critical Thinking: Watch Competition Video

Workbook Pg. 58, 138

“Perfect Competition”

CH. 7.3

“What are the characteristics of monopolistic competition and oligopoly?”

Objectives Characteristics/Examples of monopolistic

competition How Firms compete w/out lowering prices How firms in monopolistic competitive market

set output Characteristics/examples of an oligopoly

Key Terms http://

www.pearsonsuccessnet.com/snpapp/iText/products/0-13-369833-5/Flash/Ch07/Econ_OnlineLectureNotes_ch7_s3.swf

INTRODUCTION: CHARACTERISTICS OF MONOPOLISTIC COMPETITIONS AND OLIGOPOLY

Many firms in Market

Some variety of goods

Minimal barriers to entry

Little control over prices

Few firms in the market

Some Variety of Goods

Many Barriers to Entry

Some control over prices

Monopolistic Oligopoly

MONOPOLISTIC COMPETITION

Many companies compete in an open market to sell similar, but not identical, products

Examples Specialty Shops (bagel, coffee, candy) Gas Stations Retail Stores Jean Stores

Conditions Many Firms: Low start-up costs allows large entry Few Barriers: Easy for new firms Little control over Price: Firms can’t raise prices much

for fear of costumers going elsewhere Differentiated Products

Allows a firm to profit from the differences b.t their product and competitor’s

NONPRICE COMPETITION

NonPrice competitions can be another way firms differentiate their products Physical Characteristics

Size, color, shape, texture can all differentiate Location

Convenience of location is huge! Advertising, Image, or Status

Look around…. Why do some people buy one T-shirt over another? They both cover your bodies?

PRICES

Prices, Output, and profits under monopolistic competition structures look similar to PC Market

Prices Prices are higher than PC market but demand

curve is more Elastic b/c customers can choose substitutes

Output Elasticity in MC firms causes total output to fall

between a monopoly and PC market Profits

Can earn just enough to cover all of costs Short term profits, but competition makes profit

hard to maintain

OLIGOPOLY

Market dominated by few, profitable firms Barriers to Entry

Can be technological or created by system of govt. licenses or patents Economies of scale can also lead to oligopoly

3 Practices that concern Govt. from Oligopolies Price Leadership: can lead to price wars Collusion: Leads to price fixing and is illegal

Agreement among oligopoly leaders to set prices/output

Cartels: Organization of producers that agree to fix production/prices (OPEC) (See 178) Also illegal in U.S. Survive if every member sticks to plan

LESSON CLOSING

Virtual Economics Activity w/partner Maintaining competition Due Next Friday

Go in as Project Grade

Workbook pgs 59, 145

BELL WORKGet books/notes out

Answer Main ideas 3-7 on small sheet of paper

CHAPTER 7.4

“When does the govt. regulate competition?” Objectives

How firms might try to increase their market 3 market practices the govt. regulates or bans to

protect competition What is regulation, and its effects on some

industries Key Terms

http://www.pearsonsuccessnet.com/snpapp/iText/products/0-13-369833-5/Flash/Ch07/Econ_OnlineLectureNotes_ch7_s4.swf

INTRODUCTION

When does the govt. regulate competition? Govt. sometimes takes steps to promote

competition to promote lower prices Done through….

Anti-trust laws Approving/not approving mergers Deregulation

INCREASING MARKET POWER

Monopolies/Oligopolies are viewed as bad for consumers and economy Firms try and merge

with one another and drop prices in order to gain more market power and push others out

GOVT. AND COMPETITION

Fed. Govt. has policies know as anti-trust laws Meant to keep firms from gaining too much

market power FTC and DOJs Antitrust Division watch firms to

make sure they only act fairly History of Antitrust Policy

Despite laws, companies have used other strategies to gain market control

3 GOVT. ACTIONS

Regulating Businesses Govt. can regulate companies that try to get

around antitrust laws 1997, DOJ accuses Microsoft of using near-

monopoly over the operating system market to try to take control of the browser market

Judge ruled against Microsoft. MSFT could not force computer manufacturers to

provide only MSFT software on new computers

3 GOVT. ACTIONS CONT’D

Blocking Mergers Govt. can block mergers to prevent rise of

monopolies Also checks in on past mergers to make sure

they are not leading to monopolies Govt. looks to predict effects of merger before

approval

Corporate Mergers Can benefit consumers too

Lower average prices which leads to: Lower prices More reliable products/services More efficient industry

DEREGULATION

Govt. no longer decides what role each company can play in market and how much it can charge

Some regulation had been seen to reduce competition, leading to deregulation

Examples of Deregulation Airlines Trucking Banking Natural Gas RR Television Broadcasting

JUDGING DEREGULATION

How does it encourage competition? Many new firms usually enter right away Often weeds out weaker players in long-run

Example When airlines deregulated, many new firms

entered market, but some eventually failed Competition increased among airlines and prices

went down

LESSON CLOSING

How the Economy Works Video Start on Essay Complete All of Workbook for Ch. 7 Study day Monday Test Tuesday