Chapter Introduction
Section 1: Competition and
Market
Structures
Section 2: Market Failures
Section 3: The Role of
Government
Visual Summary
A developer has acquired the
large piece of vacant land
across the street from your
house and plans to build a
large shopping mall on the
property. How might you
benefit from the mall? How
might it negatively impact
your life? Read Chapter 7 to
learn about market structures
and economic growth.
1. The profit motive acts as an
incentive for people to produce
and sell goods and services.
2. Economists look at a variety of
factors to assess the growth and
performance of a nation’s
economy.
3. Governments strive for a
balance between the costs and
benefits of their economic
policies to promote economic
stability and growth.
Section Preview
In this section, you will learn that market
structures include perfect competition,
monopolistic competition, oligopoly, and
monopoly.
Content Vocabulary
• laissez-faire
• market
structure
• perfect
competition
• imperfect
competition
• monopolistic
competition
• product
differentiation
• natural
monopoly
• nonprice
competition
• economies of
scale
• oligopoly
• geographic
monopoly
• collusion
• price-fixing
• monopoly
• technological
monopoly
• government
monopoly
Academic Vocabulary
• theoretically
• equate
What is the incentive for people to
produce and sell goods and
services?
A. Competition
B. Profit motive
C. Can make a better
product
0%
A
0%
B
A. A
B.
0% B
C.
C
C
Competition and Market Structures
• In 1776, the average factory was small
and businesses were competitive.
Laissez-faire was the economic
philosophy.
• The supply side of the market today has
many firms of different sizes producing
slightly different products.
• These conditions help determine market
structure.
Competition and Market Structures (cont.)
• Economists group businesses into four
market structures.
Perfect Competition
Perfect competition is an ideal
market situation used to
evaluate other market
structures.
Perfect Competition (cont.)
• Perfect competition—a theoretical ideal
used to evaluate other market structures
Perfect Competition and Profit Maximization
Perfect Competition (cont.)
• Perfect competition has five necessary
conditions:
1. There is a large number of buyers and sellers.
2. Buyers and sellers deal in identical products.
3. Each buyer and seller acts independently.
4. Buyers and sellers are well informed about
prices and products.
5. Buyers and sellers are free to enter, conduct,
and shut down.
Perfect Competition (cont.)
• Market supply and demand set the
product’s equilibrium price.
• Few perfectly competitive markets exist.
Perfect Competition (cont.)
• Imperfect competition results in
– Less competition
– Higher prices for consumers
– Fewer products offered
Why do so few perfectly competitive
markets exist?
A. Prices offered are too high
for consumers.
0%
0%
D
A
B
C0%
D
C
A
A.
B.
C. Overhead costs are too high
0%
C.
to make it work.
D.
D. Too competitive to be successful
B
B. Difficult to satisfy all five
necessary conditions
Monopolistic Competition
Monopolistic competition
shares all the conditions of
perfect competition except
the same goods or services.
Monopolistic Competition (cont.)
• Under monopolistic competition,
products are similar.
• Monopolistic—seller’s ability to raise the
price within a narrow range
• Competitive—If sellers raise or lower the
price enough, customers will ignore minor
differences and change brands.
Monopolistic Competition (cont.)
• Monopolistic competition is characterized
by product differentiation.
• This is done through nonprice
competition.
Are designer labels really better than
store brand names when it comes to
shoes, clothing, or makeup?
A. Absolutely
B. Sometimes
C. Never
0%
A
A. A
B. B
C.0%C
B
0%
C
Oligopoly
Oligopoly describes a market
in which a few sellers
dominate an industry.
Oligopoly (cont.)
• Oligopoly products may have distinct
features like makes and models in the auto
industry; or products that can be
standardized as in the steel industry.
Oligopoly (cont.)
• Because oligopolies are so large, when
one firm lowers its price or introduces a
new product, other firms follow.
• This interdependent behavior takes the
form of collusion.
– Price-fixing
– Collusion restrains trade and is against
the law.
What are the ramifications of
collusion?
A. All firms within an industry
benefit.
0%
D
C
D. Several of the above
answers are true.
B
C. Leads to lower prices for
the consumer
A. A
B. B
C.0%C 0%
0%
D. D
A
B. Against the law
Monopoly
A monopoly is a market with
only one seller for a particular
product.
Monopoly (cont.)
• Monopoly is at the opposite end of the
spectrum from perfect competition.
• Few real monopolies exist today.
– Americans dislike them.
– New technologies compete with existing
monopolies.
Characteristics of Market Structures
Monopoly (cont.)
• Types of monopolies
– Natural monopoly
• Government gives a public utility a franchise.
• Economies of scale
Monopoly (cont.)
• Types of monopolies
– Geographic monopoly
– Technological monopoly—
Government grants a patent or
copyright.
– Government monopoly
Profiles in Economics:
Bill Gates
Compared to an oligopoly industry,
what kind of prices do consumers in
a monopoly pay?
A. Higher
B. Lower
C. The same
A. A
B. B
C. C
0%
A
0%
B
0%
C
Section Preview
In this section, you will find out that inadequate
competition, inadequate information, immobile
resources, public goods, and externalities can
lead to market failures.
Content Vocabulary
• market failure • externality
• public goods
• negative
externality
Academic Vocabulary
• collude
• sustain
• positive
externality
Are you familiar with any businesses
today that may engage in price-fixing?
A. Yes
B. No
C. Maybe
0%
A
A. A
B. B
C. C
0%
B
0%
C
Types of Market Failures
Markets can sometimes fail
because of inadequate
competition, inadequate
information, resource
immobility, public goods, and
externalities.
Types of Market Failures (cont.)
• Five main causes of market failure
– Inadequate competition
– Inadequate information
– Resource immobility
– Public goods
Types of Market Failures (cont.)
• Five main causes of market failure
– Externalities
• Negative externality
• Positive externality
How does inadequate information
lead to market failure?
A. Profits spent on executives
B. Positive externalities result
C. Slow drain on the economy
A. A
B. B
C. C
0%
A
0%
B
0%
C
Dealing with Externalities
Externalities indicate a market
failure and can be corrected
with government action.
Dealing with Externalities (cont.)
• Externalities distort decisions made by
consumers and producers, resulting in a
less efficient economy.
Dealing with Externalities (cont.)
• Correcting negative externalities
– Government adds a tax onto products
sold by the firm.
– Firms have less incentive because the
tax increases their product’s price.
– Higher prices reduce quantity
demanded.
– People affected may face fewer
problems.
Dealing with Externalities (cont.)
• Correcting positive externalities
– Subsidizing local programs, such as
education, helps communities.
– Programs are expensive and many are
left underfunded.
Do you think a fully paid educational
program for all citizens, from preschool
through college, would make communities
substantially better than they are?
A. Absolutely
0%
C
0%
B
C. Won’t change the
community at all
A. A
B. B
C. 0%C
A
B. May not change the
community much
Section Preview
In this section, you will learn that one of the
economic functions of government in a market
economy is to maintain competition.
Content Vocabulary
• trust
• price
discrimination
• cease and
desist order
Academic Vocabulary
• restrained
• intervention
• public
disclosure
Have you or your family ever had a
product you purchased recalled?
A. Yes
B. No
A. A
B. B
0%
A
0%
B
Maintain Competition
The government exercises its
power to maintain
competition within markets.
Maintain Competition (cont.)
• Two ways government maintains
competitive markets
– Prohibiting market structures that are not
competitive
– Regulating markets where full
competition is not possible
Maintain Competition (cont.)
• Laws have historically been passed to
restrict monopolies and trusts.
– Congress passed the Sherman Antitrust
Act in 1890.
– Clayton Antitrust Act in 1914 outlawed
price discrimination.
Anti-Monopoly Legislation
Maintain Competition (cont.)
• Laws have historically been passed to
restrict monopolies and trusts.
– Federal Trade Commission Act gave
authority to issue a cease and
desist order.
Anti-Monopoly Legislation
Maintain Competition (cont.)
• Natural monopolies are not necessarily
bad and therefore should not be
broken up.
• Many monopolies are regulated by
government agencies.
Federal Regulatory Agencies
Which governmental agency
oversees our air and water?
A. Federal Trade Commission
B. Environmental Protection Agency
A. A
C. Food and Drug Administration B. B
C. C
0%
C
0%
B
A
0%
Improve Economic Efficiency
Providing public goods and
promoting transparency can
improve economic efficiency.
Improve Economic Efficiency (cont.)
• Efficient and competitive markets need
adequate and transparent information.
• Therefore, public disclosure is
paramount to economic efficiency.
Improve Economic Efficiency (cont.)
• Truth-in-advertising laws
• Consumer lending laws
• Securities and Exchange Commission
• Government documents, studies, and
reports are available in public libraries.
Improve Economic Efficiency (cont.)
• Government provides many public goods
because a free economy does not promote
them.
• Public goods, like decent roads and
highways, make the economy more
productive.
• Firms need an educated workforce.
Why is public disclosure so important
to consumers?
A. Protects workers
B. Protects retirement and
stock investments
C. Promotes safe products
and services
D. All of the above
A. A
B. B
0% C.0%C
D. D
A
B
0%
C
0%
D
Modified Free Enterprise
Because the government is
involved in certain aspects of
our economy, it is a modified
version of free enterprise.
Modified Free Enterprise (cont.)
• A modified free enterprise economy is a
result of the U.S. economy evolving over
time.
• Government has a responsibility to protect
the rights of workers and protect
consumers from false claims, harmful
products, and price gouging.
Modified Free Enterprise (cont.)
• Now government concerns are focused on
promoting economic efficiency by
supplying public goods and promoting
transparency.
Is government intervening enough when it comes to
identity theft, which has become so rampant today?
A. More work needs to be done by the
government.
B. More work needs to be done by the
private sector instead of the government.
C. Both the public and private sectors
need to help curtail this problem.
D. There is no problem and therefore
nothing needs to be done.
A.
B.
C.
0%
D.
A
A
B
C
0%
D
B
0%
C
0%
D
Market Structures We can differentiate among four
different market structures. One is called perfect
competition; the other three are different kinds of
imperfect competition.
Market Failures When one of the conditions
necessary for competitive markets does not exist,
market failures can occur. Markets usually fail
because of one of five factors.
Government Roles In order to carry out its legal
and social obligations, the government can
encourage competition and regulate monopolies.
Bill Gates (1955– )
• co-founder and chairman of
Microsoft Corporation
• ranked the richest man in
the world for 12 years in
a row
Economic Concepts
Transparencies
Transparency 9
Competition and
Market Structure
Transparency 11 Market Failures
Transparency 12 The Role of the
Government
Select a transparency to view.
laissez-faire
philosophy that government should
not interfere with business activities
market structure
nature and degree of competition
among firms in the same industry
perfect competition
market structure with many wellinformed and independent buyers
and sellers who exchange identical
products
imperfect competition
market structure that does not meet
all conditions of perfect competition
monopolistic competition
market structure that meets all
conditions of perfect competition
except identical products
product differentiation
real or imagined differences between
competing products in the same
industry
nonprice competition
sales strategy focusing on a product’s
appearance, quality, or design rather
than its price
oligopoly
market structure in which a few large
sellers dominate the industry
collusion
agreement, usually illegal, among
producers to fix prices, limit output, or
divide markets
price-fixing
agreement, usually illegal, by firms to
charge the same price for a product
monopoly
market structure with a single seller of
a particular product
natural monopoly
market structure where average costs
of production are lowest when a
single firm exists
economies of scale
situation in which the average cost of
production falls as a firm gets larger
geographic monopoly
market structure in which one firm
has a monopoly in a geographic area
technological monopoly
monopoly based on a firm’s
ownership or control of a production
method, process, or other scientific
advance
government monopoly
a monopoly owned and operated by
the government
theoretically
existing only in theory; not practical
equate
to represent as equal or equivalent
market failure
condition that causes a competitive
market to fail
public goods
goods or services whose benefits are
available to everyone and are paid for
collectively
externality
economic side effect that affects an
uninvolved third party
negative externality
harmful side effect that affects an
uninvolved third party
positive externality
beneficial side effect that affects an
uninvolved third party
collude
to act together in secret, especially
with harmful or illegal intent
sustain
to support or hold up
trust
illegal combination of corporations or
companies organized to hinder
competition
price discrimination
practice of selling the same product at
different prices to different buyers
cease and desist order
ruling requiring a company to stop an
unfair business practice that reduces
or limits competition
public disclosure
requirement that a business reveal
information about its products or its
operations to the public
restrained
limited the activity or growth of
intervention
involvement in a situation to alter the
outcome
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