Section 1: Guided Reading and Review – PERFECT COMPETITION
The Perfect Market Structure
1. Cause: The large number of buyers and sellers make it unlikely that they will set prices through bargaining.
Effect: The market determines price without influence from suppliers or consumers.
2. Cause: Because products are the same, buyers will not pay extra for the product.
Effect: Identical products are key to perfect competition.
3. Cause: Entrepreneurs are less likely to enter a market with high start-up costs.
Effect: Markets with high start up costs are less likely to be perfect competition.
4. Cause: Sometimes firms cannot make enough to stay in business.
Effect: Firms freely enter and leave a perfectly competitive market.
5. Cause: Many sellers compete to offer commodities to buyers.
Effect: Prices are forced down to the point where they just cover the seller’s costs of doing business.
6. Cause: No producer can influence prices in perfectly competitive markets.
Effect: Producers adjust their output decisions based on their most efficient use of available land, labor, and
capital.
Reviewing Key Terms
7. Perfect competition – A market with many well-informed buyers and sellers, identical products, and free entry
and exit.
8. Commodity – A product considered the same regardless of who makes or sells it.
9. Barrier to entry – Any factor that makes it difficult for new firms to enter a market.
10. Start-up Costs – Expenses a new business must pay before the first product reaches the customer.
Monopolistic Competition
Defining Conditions: many sellers, no artificial barriers, slight control overprice, differentiated products.
Forms of Nonprice Competition: Different physical characteristics, Location of sale, customer service level, and
advertising image or status.
Price-Output Relationship: One rises the other falls.
Curbs on High Profits: Significant barriers to entry, high start up costs, economies of scale
OLIGOPOLY
Conditions Encouraging Formation: Significant barriers to entry
Practices that concern Government: Price Leadership, Collusion, Cartel
Monopoly
In the Monopolist Market
Natural Monopolies
1. Why they exist – Competing sellers would create less efficient market
2. Two examples – Public water companies or Public electric utilities
3. Advantage of – Can avoid wasting resources for duplicate facilities
4. Government role in - Government may allow one firm in each geographical area; it then controls
pricing and what services are to be offered.
Government Monopolies
5. Type set up by patents – Technological
6. Why government grants patented monopolies – To encourage research and development that
benefits society
7. Example of an industrial monopoly – Professional Sports Leagues
8. Two examples of government monopolies by license – Radio and television broadcast frequencies,
and city public parking lots.
Production and Pricing
9. Effect of a monopolist’s price increase – It will generally sell less.
10. Relationship between price and marginal revenue when a monopolist cuts the price to sell more
– Marginal revenue is less than price.
11. How a monopolist maximizes profits – Chooses a level of output where marginal costs = marginal
revenue.
Reviewing Key Terms
12. In a market with only one seller, that seller has a monopoly.
13. Characteristics that cause a producer’s average cost to drop as production rises are economies of
scale.
14. A contract issued by a local authority that gives a single firm the right to sell its goods within an
exclusive market is a franchise.
15. A monopoly offering targeted discounts is practicing Price Discrimination.