Chapter 7: Market Structure - Phillipsburg School District / …€¦ · · 2011-10-06Chapter 7:...
Transcript of Chapter 7: Market Structure - Phillipsburg School District / …€¦ · · 2011-10-06Chapter 7:...
Chapter 7: Market Structure 1. Perfect Competition 2. Monopoly 3. Monopolistic Competition and Oligopoly 4. Regulation and Deregulation
Property Management Software. Real-Estate-Google-Monopoly http://www.trexglobal.com. (accessed October 2, 2010).
How does Competition
How does Competition
affect your choices?
affect your choices?
1. Perfect Competition The simplest market structure in which a large number of
firms all produce the same product an no single seller controls supply or price
New York Stock
Exchange
Free Software
Street Vendors
Fishing Market,
Vegetable or fruit
vendors
New York Stock Exchange
A Stock Exchange located at 11 Wall Street Lower Manhattan, NYC Largest by market capitalization of its listed companies at $11.92 trillion as of Aug
2010
Four Conditions
Many Buyers and Sellers participate in the market
Sellers offer identical products- commodity -a product that is the same no matter who produces or sells it
Examples notebook paper, paper clips, sugar, low grade gasoline
Buyers and Sellers are well informed
Sellers are able to enter and exit the market freely
InformedBuyers and
Sellers
Free Market Entry and Exit
No control Over Price
Identical Products
Many BuyersAnd Sellers
PerfectCompetition
Barriers to Entry Any factor that
makes it difficult for a new firm to enter a market
Imperfect competition - a market structure that fails to meet the conditions of perfect competition
Start-Up Costs -expenses a new business must pay before it can begin to produce and sell goods
Technology -need a lot of preparation and study
Perfect Competition
Number of Firms:Many
Variety of Goods:None
Barriers to Entry:None
Control over Prices:None
Price and Output Competition within Perfect Competition market keep both
prices and production costs low
Quantity (Output)
Price
DemandSupply
Equilibrium Price
Equilibrium
Quantity
5
50
10
10
Market Equilibrium in Perfect Competition
What factors allow a perfectly competitive market to reach equilibrium?
What prevents any on firm from raising its prices?
2. Monopoly A market in which a single seller dominates Economies of Scale -factors that cause a producer’s average
cost per unit to fall as output rises Natural monopolies -a market that runs most efficiently
when one large firm provides all of the output Technology and Change – can ruin monopolies (example AT&T
to cell phones)
To prevent resources from being wasted, public water is a natural monopoly.
Nivangune, Geetai, A Clean Desk=A Healthier You, Medimanage.com (accessed October 2, 2010
Effects on Economies Of Scale
Average Total Cost Curve Without Economies of Scale
Average Total Cost Curve Average Total Cost Curve With Economies of ScaleWith Economies of Scale
Cost
Cost
OutputOutput
Average Costs Rises when output exceeds a certain level.
Average Costs of production falls when firms produce more
Why do production costs fall as output increases? Describe the cost curve for a firm without economies of scale.
Perfect Competition vs. Monopoly
Perfect Competition
Number of Firms:Many
Variety of Goods:None
Barriers to Entry:None
Control over Prices:None
Monopoly
Number of Firms:One
Variety of Goods:None
Barriers to Entry:Complete
Control over Prices:Complete
How are monopolies similar to perfect competition? Different?
Government Monopolies
A Monopoly created by the government A Patent - license giving inventor exclusive right for a specific
period of time Franchise -a contract that gives a single firm the right to sell its
goods within an exclusive market License -gov’t issued right to operate a business Industrial Organizations -Major League Baseball
Output Decisions
Monopolies face limited choice –either output or price
Monopolistic Dilemma -if a company produces more, the price will fall, if it produces less, the price will rise
Falling Marginal Revenue-if company decrease price, demand will increase, but marginal revenue will decrease
Setting a Price -Marginal revenue is slightly higher than the price
PricePrice Week Week DemandDemand
Total Total RevenueRevenue
Change Change in Revin Rev
Marginal Marginal RevenueRevenue
$12 $12 8,0008,000 $96,000$96,000 ------ ------
$11$11 9,0009,000 $99,000$99,000 $3,000$3,000 $3$3
$10$10 10,00010,000 $100,000$100,000 $1,000$1,000 $1$1
$9$9 11,00011,000 $99,000$99,000 $$--1,0001,000 $$--11
$8$8 12,00012,000 $96,000$96,000 --3,000$3,000$ $$--33
Demand Schedule for a Product
Output Decisions When 8,000 doses are made, the
market price is 12. PricePrice Week Week DemandDemand
Total Total RevenueRevenue
Change Change in Revin Rev
Marginal Marginal RevenueRevenue
$12 $12 8,0008,000 $96,000$96,000 ------ ------
$11$11 9,0009,000 $99,000$99,000 $3,000$3,000 $3$3
$10$10 10,00010,000 $100,000$100,000 $1,000$1,000 $1$1
$9$9 11,00011,000 $99,000$99,000 $$--1,0001,000 $$--11
$8$8 12,00012,000 $96,000$96,000 --3,000$3,000$
$$--33
Demand Schedule for a Product
Prices
Output108 120
8
10
12
As production rises to 11,000 As production rises to 11,000 doses, the price falls to $9doses, the price falls to $9..
Why does revenue fall production increases from 10,000 to 11,000? How does producing fewer goods benefit a monopolist?
Price Discrimination The division of consumers into groups based on how much they will pay for
a good Market Power -ability to control prices and total market output Targeted Discounts -discounted airline fares, Manufacturers’ Rebates,
Senior citizen discounts, children . . . free
Setting a Price in a Monopoly
Output
Price
0 9,000
$3
$11 DemandMarket Price
a
b
c
Margina
l Cost
Marginal Revenue
How does Point C show the benefits to consumers in a perfectly competitive market?
Limits of Price Discrimination
Market must meet three conditions Some market Power -must have some control Distinct Customer Groups – seniors v. citizens Difficult resale-
3. Monopolistic Competition and Oligopoly
A market structure in which many companies sell products that are similar but not identical
Different from perfect competition because products are not similar
Examples – Jeans, bagel shops, ice cream stands, gas stations, retail store
Like, NO,Tyler, I wouldnever go out with you!
•Jeans are an example of monopolistic competition because jeans can vary size, color, style, and designer
•“Are those bugle boy jeans you are wearing.”
Four Conditions
Many firms -not marked by economies of scale
Few article barriers to entry
Little control over price -will buy others if price rises
Differentiated products -making a product different from others, but similar
MonopolisticCompetition
Number of Firms:Many
Variety of Goods:Somed
Barriers to Entry:Low
Control over Prices:Limited
Non price Competition A way to attract customers through style, service, or location, but not
at a lower price Physical characteristics -running shoes, pens, cars, and toothpaste Location -will fail or succeed based on location Service Level -fast food, dinners Advertising, image, or status – designer names
•The designer athletic shoes are way more expensive than the sensible sneakers, but you buy them anyways.
•Status along with designer shoe is a form of non price competition
•Wawa is closer to Mr. Schenk’s house than Giant. For a late night snack, he will go to Wawa for peanut butter cups, even though they are cheaper at Giant
Prices, Output, and Profits
Prices – competition curves raising prices Output – falls pretty fairly Profits – earn just enough to cover costs
Oligopoly
A market structure in which a few large firms dominate a market
Markets for air travel, automobiles, breakfast cereals, and household appliances
Pepsi, Coke, Coca Cola
Oligopoly
Number of Firms:A Few
Variety of Goods:Some
Barriers to Entry:High
Control over Prices:Some
Oligarchy Barriers to entry -technological or
through government licenses or patents-high start up costs
Price Wars -a series of competitive price cuts that lowers the market price below the cost of production
Collision – illegal agreement among firms to divide the market
Price fixing- an agreement among firms to charge one price for the same good
Cartel -a formal organization of producers that agree to coordinate prices and production
The U.S. government decides to go after an agri-business giant with a price-fixing accusation, based on the evidence submitted by their star witness, vice president turned informant Mark Whitacre Mark Whitacre has worked for lysine developing company ADM for many years and has even found his way into upper management. But nothing has prepared him for the job he is about to undertake - being a spy for the FBI. Unwillingly pressured into working as an informant against the illegal price-fixing activities of his company, Whitacre gradually adopts the idea that he's a true secret agent. But as his incessant lies keep piling up, his world begins crashing down around him
The OPEC Cartel The Organization of Petroleum
Exporting Countries (OPEC) is an international cartel of major oil producers. OPEC members produce about 40% of the world’s oil and control about 75% of the world’s oil reserves. Members meet regularly to set production quotas. Most experts agree that world oil supplies are not sufficient to meet increased demand. In 2008, Libya’s OPEC delegation made a prediction: “The easy, cheap oil is over.”
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1stQtr
EuropeanUnion
OPEC
Non-OPEC
Russia
Share of Total Oil Reserves
Who controls most of the oil reserves? How about the least? How does that affect the
United States?
Powerful trusts in the late 1800’s led Congress to pass antitrust legislation.
4. Regulation and Deregulation
Sometimes the government takes steps to promote competition because markets with more competition have lower prices.
Market Power -ability of a firm to control prices and total output
Predatory Pricing -selling a price below cost for a short period of time to drive competition out
Government and Competition Sherman Anti Trust – laws that encouraged competition
in the market place Government broke up monopolies Blocking Mergers -when two or more companies join to
form single firm
Key
Even
ts in
Fed
eral
Ant
iTru
st P
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y DateDate EventEvent
19011901 Theodore Roosevelt became President and begins Theodore Roosevelt became President and begins enforcing the 1890enforcing the 1890’’s Sherman AntiTrust Act, which s Sherman AntiTrust Act, which outlaws mergers and monopolies that restrain trade outlaws mergers and monopolies that restrain trade between states.between states.
19111911 Supreme Court breaks up RockefellerSupreme Court breaks up Rockefeller’’s Standard Oil s Standard Oil Trust Company Trust Company
19501950 CellerCeller--Kefauver Act allows government to stop Kefauver Act allows government to stop mergers that could hurt competitionmergers that could hurt competition
19821982 AT&T agrees to break up its local phone service into AT&T agrees to break up its local phone service into several companiesseveral companies
20012001 Department of Justice settles its lawsuit with Department of Justice settles its lawsuit with Microsoft.Microsoft.
Deregulation The removal of some government controls over a market Decided in the late 1970’s, Congress deregulated some of
the market because it was reducing competition. Deregulated the airlines, trucking, banking, railroad, natural
gas, and television broadcasting industries
Regulation and DeregulationGovernment Passes Antitrust Laws
Laws are used to regulate business
New laws limit unfair business
Deregulation promotes competition
Comparison of Market Structures
Perfect Perfect CompetitionCompetition
Monopolistic Monopolistic CompetitionCompetition
OligopolyOligopoly MonopolyMonopoly
Number of Number of FirmsFirms
ManyMany ManyMany A Few A Few DominateDominate
OneOne
Variety of Variety of GoodsGoods
NoneNone SomeSome SomeSome NoneNone
Control over Control over PricesPrices
None None LittleLittle SomeSome CompleteComplete
Barriers to Barriers to EntryEntry
None None LowLow HighHigh CompleteComplete
ExamplesExamples Wheat, Wheat, Shares of Shares of stockstock
Jeans, BooksJeans, Books Cars, Movie Cars, Movie Studios, Studios, Soda Soda CompaniesCompanies
Public WaterPublic Water