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 options Sellers are able to sell their products at market price 2. Standardized product A product that consumers see as identical regardless of the producer Example: 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 standardized Examples: 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.