CHAPTER 7: MARKET
STRUCTURES
S1: 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/0-13369833-5/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


Sellers offering identical products


No difference in products sold: gas, paper, sugar.
Buyers/sellers well-informed about products


No 1 person/firm can be too powerful so to influence total
market qty. or price
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: MONOPOLY
BW: Refresh self on Critical thinking 8-10 pg. 163
Finish workbook work….
CRITICAL THINKING
1.
Which markets are close to Perfect competition
1.
2.
Commodities?
1.
3.
Buyers would make decisions based on differences b/t
products
Barriers to entry
1.
6.
Products must be identical, buyers will not pay more for
one producers good
What would happen today?
1.
5.
Products same regardless of producer
Why must PC markets always deal in commodities?
1.
4.
Paper clips and white socks
Factors that make it difficult to enter a market
2 other specific examples
1.
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/0-13369833-5/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 WORK
Finish 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/produc
ts/0-13-3698335/Flash/Ch07/Econ_OnlineLectureNotes_ch7_s3.swf
INTRODUCTION: CHARACTERISTICS OF
MONOPOLISTIC COMPETITIONS AND OLIGOPOLY
Monopolistic
Many firms in Market
 Some variety of goods
 Minimal barriers to
entry
 Little control over
prices

Oligopoly
Few firms in the
market
 Some Variety of Goods
 Many Barriers to
Entry
 Some control over
prices

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


Location


Size, color, shape, texture can all differentiate
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



Output


Prices are higher than PC market but demand curve
is more Elastic b/c customers can choose substitutes
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 WORK
Get 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/produc
ts/0-13-3698335/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
