Competition and Market
Structures
Jump Start Chapter 7 section 1
1.
2.
3.
4.
5.
Perfect competition is characterized by all of the following EXCEPT:
A.
A smaller number of buyers and sellers
B.
Well informed buyers and sellers
C.
Identical products
D.
Independent buyers and sellers
A monopoly based on the absence of other sellers in a certain location is called
A.
An oligopoly
B.
A natural monopoly
C.
A geographic monopoly
D.
Economies of scale
Monopolistic competition is separated from pure competition by:
A.
Collusion
B.
Profit maximization
C.
Product differentiation
D.
Imperfect competition
Oligopoly is a market structure with a great deal of
A.
Competition among firms
B.
Interdependence among firms
C.
Independence among firms
D.
Profits among firms
A monopoly’s prices are determined by:
A.
competing firms
B.
market equilibrium
C.
perfect competition
D.
the monopoly
Perfect Competition
Market Structure
• Characterized by the degree of
competition among business in the same
industry
•
•
•
•
•
Types of Competition:
Pure Competition
Monopolistic Competition
Oligopoly
Monopoly
Perfect (Pure) Competition
•
When a large number of buyers and
sellers exchange identical products
under five conditions
1) There should be a large number of buyers
and sellers
2) The products should be identical
3) Buyers and sellers should act independently
4) Buyers and sellers should be well-informed
5) Buyers and sellers should be free to enter,
conduct, or get out of business
Perfect Competition
• Under a Perfect Competition
– Supply and demand set the equilibrium price
– Each firms sets a level of output that will
maximize its profits at that price
• Imperfect Competition
– Refers to market structures that lack one or
more of the five conditions
Monopolistic Competition
• Meets all conditions of perfect competition
except for identical products
• Use product differentiation
– Real or imagined differences between competing
products in the same industry
• Use non-price competition
– Advertising, giveaways, promotional campaigns
• Sell within a narrow price range to try to raise
the price = profit maximization
Oligopoly
• A few large businesses dominate an
industry
• When one business makes a move, the
others usually follow
– Ex: a price war…cuts in airline ticket
• Sometimes results in collusion or pricefixing which is illegal
– Collusion: formal agreement to set prices
– Price-Fixing: charge the same
Monopoly
• One seller of a product that has no close
substitutes
– Natural Monopoly
– Geographic Monopoly
– Technological Monopoly
– Government Monopoly
Natural Monopoly
• More efficient for only one business to
produce the goods
– Ex: Marta, Water co.
• Government gives permission
Geographic Monopoly
• No other business chooses to compete in
that area
– Ex: small town drugstore
Technological Monopoly
• Results from new discoveries and
inventions.
• The government grants these monopolies
through the issue of patents and
copyrights
– Patents: inventions
– Copyrights: publish
Government Monopoly
• Involves products people need that private
industry might not adequately provide
Vocabulary
1.
2.
3.
4.
5.
Perfect competition
Non-price competition
Oligopoly
Collusion
Economies of scale
A.
B.
C.
D.
E.
Market structure in which a few
very large sellers dominate the
industry
Market situation in which a large
number of well-informed and
independent buyers and sellers
exchange identical products
The use of advertising, giveaways,
and other promotional campaigns
to convince buyers one product is
better than another
A situation in which the average
cost of production fails as the firm
gets larger
A formal agreement to set prices
or to otherwise behave in a
cooperative manner
Jump Start Chapter 7 section 1
1.
2.
3.
4.
5.
Perfect competition is characterized by all of the following ECCEPT:
A.
A smaller number of buyers and sellers
B.
Well informed buyers and sellers
C.
Identical products
D.
Independent buyers and sellers
A monopoly based on the absence of other sellers in a certain location is called
A.
An oligopoly
B.
A natural monopoly
C.
A geographic monopoly
D.
Economies of scale
Monopolistic competition is separated from pure competition by:
A.
Collusion
B.
Profit maximization
C.
Product differentiation
D.
Imperfect competition
Oligopoly is a market structure with a great deal of
A.
Competition among firms
B.
Interdependence among firms
C.
Independence among firms
D.
Profits among firms
A monopoly’s prices are determined by:
A.
competing firms
B.
market equilibrium
C.
perfect competition
D.
the monopoly
Market Failures
Section 2
Market Failures
Four conditions needed
Adequate competition must exist
Buyers and sellers must be well-informed;
opportunities in the market
Resources must be free to move from one
industry to another
Prices must reasonably reflect the cost of
production, including rewards
Failure occurs when these are altered
Jump Start Chapter 7 section 2
1.
all of the following may lead to a market failure EXCEPT
A.
B.
C.
D.
2.
Which of the following is NOT a public good?
A.
B.
C.
D.
3.
The development of monopoly
Artificial shortages and higher prices
Excessive political influence by businesses
All of the above
Positive and Negative externalities are called market failures because
A.
B.
C.
D.
5.
Community park
Fire department
Armed forces
Movie theater
What is the result of inadequate competition?
A.
B.
C.
D.
4.
resource mobility
inadequate competition
insufficient information
prices do not reflect the cost of production
They cause imperfect competition
They lead to higher prices
Their cost and benefits are not reflected in the market prices paid by buyers and sellers
They provide public goods
Which of the following is an example of resource mobility?
A.
B.
C.
D.
An engineer asking for a higher wage
An aircraft factory laying off engineers
An engineer taking a job at a different factory
An aircraft factory selling its products
Inadequate Competition
• Decrease b/c of mergers and acquisitions
• Inefficient resource allocation = no
incentive to use resources carefully
• Reduced output = monopoly can retain
high prices by limiting supply
• Large business can exert its economic
power over politics
Inadequate Competition
• Failures on the Demand side are harder to
correct than failures on the Supply side
• Supply side:
– No competition exists if a monopolist
dominates
• Demand Side
– Buyers can be found but….how many want
hydroelectric dams, space shuttles, etc…
Inadequate Information
• Consumers, businesspeople, and
government official must have adequate
information about market conditions
• Information
– Easy to find in want ads, sale prices in
newspaper
– If difficult to find = market failure
Resource Immobility
• Occurs when land, capital, labor, and
entrepreneurs stay with in a market
– Returns are slow
– Remain unemployed
• Resources will not or cannot move to a
better market
– The existing market does not always function
efficiently
Externalities
• Unintended side effects
• Negative
– Harm, cost, or inconveniences suffered by a third
party
• Positive
– Benefits received by someone who had nothing to do
with the activity that created the benefit
• Market failures
– Market prices that buyers and sellers pay do not
reflect the cost and/or benefits of the action
Public Goods
• Products that everyone consumes
– Use by one individual does not diminish the
satisfaction or value to others
• Uncrowded highways, flood control measures,
national defense, police and fire protection
• Market is successful in satisfying individual
wants and needs; fails to satisfy them on a
collective basis
• Government usually has to supply them
Vocabulary Review
1.
2.
3.
4.
5.
Market failure
Externality
Negative externality
Positive externality
Public goods
A.
B.
C.
D.
E.
An unintended side effect that
either benefits or harms an
uninvolved third party
An unwanted harm, cost, or
inconvenience suffered by a third
party because of actions by others
Products that are collectively
consumed by everyone
A benefit received by third party
that had nothing to do with the
activity that generated the benefit
Occurs when any one of the four
conditions necessary for a
competitive free enterprise
economy is significantly altered
Jump Start Chapter 7 section 2
1.
all of the following may lead to a market failure EXCEPT
A.
B.
C.
D.
2.
Which of the following is NOT a public good?
A.
B.
C.
D.
3.
The development of monopoly
Artificial shortages and higher prices
Excessive political influence by businesses
All of the above
Positive and Negative externalities are called market failures because
A.
B.
C.
D.
5.
Community park
Fire department
Armed forces
Movie theater
What is the result of inadequate competition?
A.
B.
C.
D.
4.
resource mobility
inadequate competition
insufficient information
prices do not reflect the cost of production
They cause imperfect competition
They lead to higher prices
Their cost and benefits are not reflected in the market prices paid by buyers and
sellers
They provide public goods
Which of the following is an example of resource mobility?
A.
B.
C.
D.
An engineer asking for a higher wage
An aircraft factory laying off engineers
An engineer taking a job at a different factory
An aircraft factory selling its products
The Role of Government
Jump Start Chapter 7 section 3
1.
Which of the following antitrust laws was enacted first?
A.
B.
C.
D.
2.
The federal law that first outlawed price discrimination is the
A.
B.
C.
D.
3.
Providing buyers and sellers with information
Revealing competitive trade secrets
Converting private businesses into government agencies
Concentrating information in the hands of the government
Which of the following is most likely be subject to government monopoly
regulations?
A.
B.
C.
D.
5.
Federal Trade Commission Act
Clayton Antitrust Act
Sherman Antitrust Act
Robinson-Patman Act
Public disclosures supports competition by
A.
B.
C.
D.
4.
Federal Trade Commission Act
Clayton Antitrust Act
Sherman Antitrust Act
Robinson-Patman Act
A computer software company
A large oil company
A local restaurant
A local cable company
The government takes part in the United States economy to
A.
B.
C.
D.
Encourage competition and fair play
Prevent monopolies and reduce cost of imperfect competition
Regulate industries in which monopolies serve the public good
All of the above
Antitrust Legislation
• Trust: legally formed combinations of
corporations or companies
• Antitrust laws prevent or break up
monopolies, preventing failures due to
inadequate competition
Federal Trade Commission
• Competition in the market is protected by
the government through antitrust
legislation and the creation of the Federal
Trade Commission.
• Federal Trade Commission: has the
authority to stop any unfair business
practices that reduce or limit competition
Antitrust Legislation
• 1890: Sherman Antitrust Act:1st law against
monopolies
• 1914: Clayton Antitrust Act: outlawed price
discrimination
• 1914: The Federal Trade Commission:
empowered to issues cease and desist orders,
requiring companies to stop unfair business
practices
• 1936: Robinson-Patman Act: outlawed special
discounts to some customers
Government Regulation
• Goal is to set the same level price and
service that would exist if a monopolistic
business existed under competition
• Use: tax system to regulate businesses
with negative externalities
– Prevents market failures
Public Disclosure
• Requires businesses to reveal information
about
– Products
– Services to Public:
• Banks, corporations, lending institutions
• Provides information to prevent market
failures
– “Truth in Advertising” laws (false claims)
Indirect Disclosure
• Government support of the internet
• Availability of Gov’t documents
• Businesses post information
Modified Free Enterprise
• Government intervention to encourage
– competition,
– Prevent monopolies
– Regulate industry
– Fulfill the need for public goods
Modified Free Enterprise
• Today’s US Economy
– Mixed of different market structures
– Different business organization
– Varying degrees of government regulation
Vocabulary Review
1.
2.
3.
4.
Trust
A. Strengthened previous
legislation regarding price
Clayton Antitrust Act
discrimination
Price Discrimination
B. Built on Sherman Antitrust
Robinson-Patman
Act by extending government
Act
powers against monopolies
5. Cease and desist
C. An FTC ruling requiring a
order
company to stop an unfair
business practice
D. Legally formed combinations
of corporations or companies
E. Practice of charging
customers different prices for
the same product
Jump Start Chapter 7 section 3
1.
Which of the following antitrust laws was enacted first?
A.
B.
C.
D.
2.
The federal law that first outlawed price discrimination is the
A.
B.
C.
D.
3.
Providing buyers and sellers with information
Revealing competitive trade secrets
Converting private businesses into government agencies
Concentrating information in the hands of the government
Which of the following is most likely be subject to government monopoly
regulations?
A.
B.
C.
D.
5.
Federal Trade Commission Act
Clayton Antitrust Act
Sherman Antitrust Act
Robinson-Patman Act
Public disclosures supports competition by
A.
B.
C.
D.
4.
Federal Trade Commission Act
Clayton Antitrust Act
Sherman Antitrust Act
Robinson-Patman Act
A computer software company
A large oil company
A local restaurant
A local cable company
The government takes part in the United States economy to
A.
B.
C.
D.
Encourage competition and fair play
Prevent monopolies and reduce cost of imperfect competition
Regulate industries in which monopolies serve the public good
All of the above