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.