Economics
Unit II: Microeconomics
Ch. 7 & 8: Market Structures and
Business Organizations
Microeconomic Concepts
SSEMI1 The student will describe how households, businesses, and governments are interdependent and interact
through flows of goods, services, and money.
a.
b.
Illustrate by means of a circular flow diagram, the Product market; the Resource market; the real flow of goods and services between
and among businesses, households, and government; and the flow of money.
Explain the role of money and how it facilitates exchange.
SSEMI2 The student will explain how the Law of Demand, the Law of Supply, prices, and profits work to
determine production and distribution in a market economy.
a.
b.
c.
d.
Define the Law of Supply and the Law of Demand.
Describe the role of buyers and sellers in determining market clearing price.
Illustrate on a graph how supply and demand determine equilibrium price and quantity.
Explain how prices serve as incentives in a market economy.
SSEMI3 The student will explain how markets, prices, and competition influence economic behavior.
A Identify and illustrate on a graph factors that cause changes in market supply and demand.
B Explain and illustrate on a graph how price floors create surpluses and price ceilings create shortages.
C Define price elasticity of demand and supply.
SSEMI4 The student will explain the organization and role of business and analyze the four types of market
structures in the U.S. economy.
a. Compare and contrast three forms of business organization—sole proprietorship, partnership, and corporation.
b. Explain the role of profit as an incentive for entrepreneurs.
c. Identify the basic characteristics of monopoly, oligopoly, monopolistic competition, and pure competition
Unit II: Microeconomic Concepts
Chapter
Standards
Chapter 7
EF5b, EMI4c
Chapter 8
EMIa,b
Standards Update Sheet
Name:________________________________Class:_______________Instructor:___________________
+
mastery
Standard
SSEMI1a
SSEMI1b
SSEMI2a
SSEMI2b
SSEMI2c
SSEMI2d
SSEMI3a
SSEMI3b
SSEMI3c
SSEMI4a
SSEMI4b
SSEMI4c
- needs improvement
Activity
Activity
Activity
Activity
Activity
Activity
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Unit II: Market Structures & Business Organizations
7: Market Structures
Vocabulary
FIB Notes
Daily 10
Current Events
Chapter Activity
Written Response
Study Guide
Participation
Total
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8: Business Org
Grade
Vocabulary
FIB Notes
Daily 10
Current Events
Chapter Activity
Written Response
Study Guide
Participation
Total
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Final Unit II Test
/100
CHAPTER 7 – Market Structures
Chapter 7 Section 1
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Write down the names of three companies:
1. Company with very little competition ___________________________________________________________
2. Company with two to three major competitors _____________________________________________________
3. Company with many competitors _______________________________________________________________
 Which situation do you think describes most markets in the United States? __________________________
TYPES OF MARKET STRUCTURES NOTES
CHAPTER 7
CHART SHOWS VARIOUS CHARACTERISTICS OF EACH MARKET TYPE
I. Perfectly Competitive Market Structure (P.C.):
• Infinite number of very small firms. (No single seller can influence the price because NO ONE firm owns a
large percent of the market.)
• Since each firm is small, no firm benefits from economies of scale.
• Buyers and sellers deal in identical products. (EXAMPLES: Salt, Flour, Wheat, Corn)
• Unlimited Competition: so many firms, that suppliers lose the ability to set their own price.
• No Barriers to Entry. Sellers are free to enter the market, conduct business and free to leave the market. (Low
cost to enter)
• Each firm is a price-taker (each business in the market has to be content with the current price of the product
they are selling)
• No firm in this market has any market power. (Market Power Defined: ability to set one’s own prices for a
product)
II. Oligopoly Market Structure:
• 3-4 firms that control the entire market by setting prices.
• Products are generally identical (standardized)
• High Barriers to Entry: Hard to enter the market because the competitors work together to control all the
resources & prices.
• The actions of one firm in the oligopoly, affects all the other firms.
• Market contains collusion (price fixing) which is an agreement between firms to act together or behave in a
cooperative manner. This is similar to how drug cartels operate.
• Oligopolies are the most dangerous to consumers since they are not as easily recognized by government
regulations (anti-trust laws) since they are technically not a monopoly.
III. Monopolistic Competitive Market Structure (M.C.):
• Large number of large companies. (but fewer firms than perfect competition)
• Sellers can influence the price through creating a product identity.
• Products are not exactly identical, but are very similar, so companies use product differentiation. (marketing
using color, logo, brand names, etc.) Firms in a M.C. generally do not mention price in their
advertisement. Instead they note all the products features. This is called non-price competition.
• Heavy Competition: Firms must remain aware of their competitor’s actions, but they each have some ability to control
their own prices.
• Low Barriers to Entry: easier than Oligopoly and Monopoly to get started because of the less amount of competition.
(Monopolistic competition takes its name and its structure from elements of monopoly and perfect competition.)
• Firms in a M.C. generally are too large to completely fail. Instead they merge with other firms.
There are 3 different types of mergers:
Vertical Merger: firms looking to save on costs will merge with a resource provide
(example: McDonalds buys a paper cup manufacture or a cattle ranch; Ford buys a steel manufacture)
Horizontal Merger: firms in competing industries buy each other in order to dominate one single industry
(example: McDonalds buys Wendys; Nissan buys Honda)
Conglomerate: firms in unrelated industries buy each other in order to offer a diversified set of products
(example: Procter & Gamble who produces everything from shampoo, to dog food, to coffee, to Duracell batteries)
IV. Monopoly Market Structure (Mono):
• There is a single seller.
• No substitute goods are available. Thus this market contains only inelastic demand.
• The firm is a price-maker. (set their own price for a product). Consumers often need the protection offered by
price ceilings in a monopoly market.
• High Barriers to Entry: it is impossible for new businesses to enter into this market
• Monopolies are very wasteful and inefficient since there is no competitive pressure on them to reduce costs.
• Monopolies are regulated by the Federal Government through anti-trust laws.
However there are 4 types of monopolies that exist in America:
Natural Monopoly: because the monopoly’s large size, it benefits from economies of scale, thus the government
allows the monopoly to operate since it is cheaper than allowing competition.
(example: Tennessee Valley Authority (TVA) provides power to much of the south, it is too expensive for another
electric provider to compete with the TVA, thus the government allow the TVA to continue to operate as a
monopoly)
Technological Monopoly: firms that request patents and trademarks cannot have their products duplicated by any
other competing firm, thus they are protected monopolies
(example: Microsoft’s copyright protect on its products; Apple’s patents of the design of all its products)
Government Monopoly: government controlled business
(example: county water provider, sale of nuclear material, Canadian healthcare system (ran by the Canadian
government)
Chapter 7 – Market Structures
Section 1 – Perfect Competition


Perfect Competition – also known as __________________________________, large number of firms producing
_____________________________________________________________________
No participants are large enough to have the _________________________________________________________


Buyers and sellers are so numerous that no ___________________________________________________
 eg. 100 firms, each firm has ___________________ of the market
Four Conditions:
1. Many _______________________________________________
2. Goods offered for sale are _______________________________________________________________
3. Buyers and sellers have _________________________________________________________________
4. Sellers are able to ______________________________________________________________________
Application – Conditions of Perfect Competition , pgs. 151- 153
Condition of Perfect Competition
Description
1. Many Buyers and Sellers
2. Identical Products
3. Informed Buyers and Sellers
4. Free Market Entry and Exit
Example(s)
Examples of Perfect Competition in the “Real World”
Commodities:
 Wheat
* _______________________________________

Oranges
* _______________________________________

Corn
* _______________________________________
Chapter 7, Section 2: Monopoly
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






Monopoly - when ______________________________________ controls the market of a _____________________
______________________________________________________________________________________________
 Microsoft, _________________, _______________________
 Complete __________________________________________
Government Monopolies – a monopoly ____________________________________________________________
Patent – gives a company _________________________________________________________________________
Franchise – the right to sell a ______________________________________________________________________
License – a government issued __________________________________________________________________
Price discrimination – division of customers __________________________________________________________
Market Power – ability to ________________________________________________________________________
Application – Targeted Discounts, pgs. 163 - 164
Targeted Discounts
Description
1. Discounted Airline Fares
2. Manufacturers Rebate Offers
3. Senior Citizen or Student Discounts
4. Children Fly or Stay Free Promotions
Chapter 7, Section 3: Monopolistic Competition and Oligopoly
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
Monopolistic Competition – many companies selling ___________________________________________________
 Market for __________________________________________
Four Conditions of Monopolistic Competition
1. Many __________________________
2. Few ___________________________________________
3. Slight control over ________________________
4. Differentiated _____________________________ (main difference between perfect and monopolistic competition)
Application – Nonprice Competition, pgs. 167 - 168
Characteristic
Description
Example(s)
1. Physical Characteristics
2. Location
3. Service Level
4. Advertising, Image or Status
Oligopoly

Oligopoly – a market structure in which a _______________________________ dominate a market; four largest firms
produce_____________________________________________________________________
 Automobile industry, _______________________________________, beer industry, cartels
 Characteristics
 High _________________________________________
 Collusion – businesses work together to ________________________________, agreement to
___________________________________________________
 Price Fixing – agreement among firms to ________________________________________________
 Cartel – a formal organization of producers that
_______________________________________________________ (OPEC)
Chapter 7 Concepts Review
Statement
1. Jane can purchase a share of Microsoft
stock from Smith Barney or Schwab. There is
no difference in the price of the product.
2. GM, Ford and Chrysler comprise 80% of
the market share for automobiles.
3. It is nearly impossible to compete with
the NFL .
4. In the market for cell phones, there are a
number of different companies to select
from.
5. OPEC controls the world’s supply of oil.
6. Cilantros offers free meals to children
under 12.
7. Publix uses the slogan, “where shopping is
a pleasure”, to differentiate their products.
8. Microsoft used its market power to
illegally force companies to not use
Netscape browsers.
Market Structure
Explanation
Comparison of Market Structures
Perfect Competition
Number of Firms
Variety of Goods
Control Over Prices
Barriers to Entry
Examples
Monopolistic
Competition
Oligopoly
Monopoly
Section 1 - Sole Proprietors




Business organization (firm) –establishment formed to _________________________________________________
 _______________________________________,_______________________________________,
_______________________________________
Sole Proprietor – business owned and _______________________________________________________________
Most _________________________ type of business organization
___________ of all businesses are sole proprietorships in the U.S.
Section 2 – Partnership
 Partnership – a business organization owned by _______________________________________________________
______________________________________________________________________________________________
 Account for about _________% of all businesses
 General Partnership – partners share _______________________________________________________________
 Limited Partnership – partnership in which only _______________________________________________________
 Limited Liability Partnership – all partners are _______________________________________________________, in
the case of _______________________________________________________.
 Articles of Partnership – outline the ________________________________________________________________
Section 3 – Corporation
 Corporation – is a legal entity, or being, owned by _____________________________________________________
______________________________________________________________________________________________
 Stock – a certificate of _______________________________________________________
 Partial owner , i.e. ___________________, purchase 1, ____________________ owner of the company
 Corporation has a separate __________________________________, an entity separate
______________________________________________
 Account for _________% of all businesses, but _______________% of all products sold
 Closely held – privately held corporations ____________________________________________________________
 Publicly held – sells stock on the market ____________________________________________________________
Mergers
 Merger – combine with ___________________________________________________________________________
 Horizontal merger – firms in the ______________________________________________________________ merge
 Vertical merger – firms involved in producing ___________________________________________________ merge
 Conglomerates – business mergers _________________________________________________________________
 Multinationals – large corporation that ______________________________________________________________
Section 4 – Other Organizations
 Business Franchise – semi-independent business that __________________________________________________
 Business is granted right to sell ____________________________________________________________________
 Cooperative – Co-ops, business organization owned and operated by _____________________________________
_______________________________________________________
 Consumer cooperative – consumers sell _____________________________________________________________
 Book clubs, ___________________________________, etc.
 Service Cooperatives – provide a ___________________________________________________________________
 ______________ unions, banking services, ________________________, _______________________, etc.
 Producer cooperatives – agricultural marketing _______________________________________________________
 Nonprofit Organizations – business that gears towards _________________________________________________
 Professional Organizations – work to improve the _________________________, working
___________________________, and skill _______________________________________________________
 National Education Association, ______________________________________________, American Bar
Association for Lawyers, etc.
 Business Organization – promote the _______________________________________________________
 Better ________________________________________________
 Trade Associations – nonprofits that ________________________________________________________________
 Labor Unions – organized group of workers __________________________________________________________
Advantages and Disadvantages of Sole Proprietorship, pgs. 185 - 188
Advantages of Sole Proprietorships
Disadvantages of Sole Proprietorships
Ease of Start-Up ____________________________________
__________________________________________________
__________________________________________________
__________________________________________________
Unlimited Personal Liability ___________________________
__________________________________________________
__________________________________________________
__________________________________________________
1. Authorization ___________________________________
______________________________________________
______________________________________________
2. Site Permit _____________________________________
______________________________________________
______________________________________________
3. Name _________________________________________
______________________________________________
______________________________________________
Limited Access to Resources __________________________
__________________________________________________
__________________________________________________
__________________________________________________
__________________________________________________
Lack of Permanence _________________________________
__________________________________________________
__________________________________________________
__________________________________________________
Relatively Few Regulations ___________________________
__________________________________________________ Lack of Fringe Benefits _______________________________
__________________________________________________ __________________________________________________
__________________________________________________ __________________________________________________
__________________________________________________
Zoning Laws _______________________________________
__________________________________________________
__________________________________________________
__________________________________________________
Sole Receiver of Profit _______________________________
__________________________________________________
__________________________________________________
__________________________________________________
Full Control ________________________________________
__________________________________________________
__________________________________________________
__________________________________________________
Easy to Discontinue _________________________________
__________________________________________________
__________________________________________________
__________________________________________________
Advantages and Disadvantages of Partnerships, pgs. 190 -193
Advantages of Partnerships
Ease of Start-Up ____________________________________
__________________________________________________
__________________________________________________
__________________________________________________
Articles of Partnership _______________________________
__________________________________________________
__________________________________________________
__________________________________________________
Uniform Partnership Act _____________________________
__________________________________________________
__________________________________________________
__________________________________________________
Shared Decision-Making and Specialization
__________________________________________________
__________________________________________________
__________________________________________________
__________________________________________________
Larger Pool of Capital________________________________
__________________________________________________
__________________________________________________
__________________________________________________
Taxation __________________________________________
__________________________________________________
__________________________________________________
__________________________________________________
Disadvantages of Partnerships
Unlimited Liability __________________________________
__________________________________________________
__________________________________________________
__________________________________________________
__________________________________________________
Potential for Conflict ________________________________
__________________________________________________
__________________________________________________
__________________________________________________
__________________________________________________
Advantages and Disadvantages of Corporations, pgs. 195 - 198
Advantages of Corporations
Disadvantages of Corporations
Advantages for Stockholders
__________________________________________________
__________________________________________________
__________________________________________________
__________________________________________________
Articles for the Corporation
__________________________________________________
__________________________________________________
__________________________________________________
__________________________________________________
Difficulty and Expense of Start-up
__________________________________________________
__________________________________________________
__________________________________________________
__________________________________________________
Certificate of Incorporation
__________________________________________________
__________________________________________________
Includes:
1. _______________________________________________
2. ________________________________________________
3. ________________________________________________
4. ________________________________________________
5. ________________________________________________
6. ________________________________________________
7. ________________________________________________
Double Taxation ____________________________________
__________________________________________________
__________________________________________________
__________________________________________________
Dividends _________________________________________
__________________________________________________
Loss of Control _____________________________________
__________________________________________________
__________________________________________________
__________________________________________________
More Regulation ____________________________________
__________________________________________________
__________________________________________________
__________________________________________________
Advantages and Disadvantages of Franchises, pg. 202
Advantages of Franchises
Disadvantages of Franchises
Management Training and Support
__________________________________________________
__________________________________________________
__________________________________________________
High Franchising Fees and Royalties
__________________________________________________
__________________________________________________
__________________________________________________
Standardized Quality
__________________________________________________
__________________________________________________
__________________________________________________
Strict Operating Standards
__________________________________________________
__________________________________________________
__________________________________________________
National Advertising Programs
__________________________________________________
__________________________________________________
__________________________________________________
Purchasing Restrictions
__________________________________________________
__________________________________________________
__________________________________________________
Financial Assistance
__________________________________________________
__________________________________________________
__________________________________________________
Limited Product Line
__________________________________________________
__________________________________________________
__________________________________________________
Centralized Buying Power
__________________________________________________
__________________________________________________
__________________________________________________
Chapter 7 and 8 Study Guide
Study Guide – Market Structures and Business Organizations pgs. 151 – 176
1. The simplest market structure is known as ___________________________________ competition, also known as
pure competition.
2. List the four conditions of perfect competition
a. ___________________________________________________________________
b. ___________________________________________________________________
c. ___________________________________________________________________
d. ___________________________________________________________________
3. Factors that make it difficult for new firms to enter a market are called
_______________________________________
4. A ______________________________ forms when one company dominates the market and is the sole provider of a
particular good or service.
5. A ______________________________ monopoly forms when one large firm provides all of the output, such as an
electric or water company.
6. What can happen to prices as a result of a monopoly?
____________________________________________________
7. A ____________________________ gives a company exclusive rights to sell a new good or service for a period of
time.
8. A ______________________________________ monopoly occurs when the government provides exclusive rights to
produce a particular good or service.
9. When Microsoft charges certain companies one price and other companies another price (higher or lower), they are
involved in a practice known as ____________________________________________________________________
10. ___________________________________________________ is the ability to control prices and total market output.
11. ______________________________________ competition occurs when many companies compete in an open
market to sell products that are similar but not identical.
12. List the four conditions of monopolistic competition
a. ___________________________________________________________________
b. ___________________________________________________________________
c. ___________________________________________________________________
d. ___________________________________________________________________
13. Give an example of the following forms of nonprice competition:
a. Physical
Characteristics_______________________________________________________________________
b. Location__________________________________________________________________________________
_
c. Service Level
_______________________________________________________________________________
d. Advertising, image, or
status___________________________________________________________________
14. A market that is dominated by a few large, firms is called an
________________________________________________
15. Oligopolies can sometime come to an agreement to set prices and control production levels, this is known as
___________________________________________________ or
___________________________________________
16. The U.S. government has _____________________________________ laws to regulate illegal practices of
monopolies.
17. In 1997, ________________________________ was brought to federal court because of illegal practices in the
computer industry.
18. A__________________________________________________ is a business owned and managed by a single
individual.
19. A ______________________________________________ is a business organization owned by two or more persons
who agree on specific divisions of responsibilities and profits.
20. A _______________________________________________ is a business organization that is considered to be a
separate legal entity, which is owned by individual stockholders.
21. The easiest form of business to start up is a
_____________________________________________________________
22. In a ______________________________________________________, there is a separate legal distinction between
the shareholders and the business, which acts as a form of protection from lawsuits and other liability.
23. A _____________________________________________ offers shared decision making and splits the responsibilities
of the ownership in a business.
24. One of the disadvantages of a _________________________________________________________ is that there is
no legal distinction between the owner and the business, which leads to unlimited liability.
25. A disadvantage of a _______________________________________ is that there is a potential for conflict because of
disagreements in decision-making.
26. Disadvantages of a _______________________________________ is that there is more government oversight,
double taxation and difficulty of startup.
27. A ________________________________________ merger is when two or more similar firms join as one entity.
28. A ________________________________________ merger is when two or more different firms join as one entity.
29. A ________________________________________ is when a firm has three or more business with unrelated
products.
30. A ________________________________________ is a type of business that pays fees to a parent company to use
their already established name.
Microeconomic Concepts Overview
SSEMI1 The student will describe how households, businesses, and governments are interdependent and interact through
flows of goods, services, and money. (pg. 30)
a. Illustrate by means of a circular flow diagram, the Product market; the Resource (factor) market; the real flow of
goods and services between and among businesses, households, and government; and the flow of money.
- Circular Flow Model
Important points:
1. The economy consists of two sectors: households and firms.
2. The product market is where consumers go to buy goods and services and firms go to sell.
3. The factor market represents the market where firms hire and households bring their f.o.p., namely labor.
SSEMI2 The student will explain how the Law of Demand, the Law of Supply, prices, and profits work to determine
production and distribution in a market economy.
a. Define the Law of Supply and the Law of Demand.
1) Law of Supply (pg. 101) – as prices rise, producers will increase production, as the fall they will decrease
production.
2) Law of Demand (pg. 79) – as prices fall, consumers will purchase more, as they increase they purchase less.
b. Describe the role of buyers and sellers in determining market clearing price (equilibrium price) (pg. 125)
Consumers’ purchases indicate to the supplier what to produce and how much. Where there is balance in the
QD and QS will be the market clearing price/equilibrium price.
c. Illustrate on a graph how supply and demand determine equilibrium price and quantity (pgs. 125 – 131).
Important points:
- Price of the item on the y – axis (differs, but always the price of the item)
- Quantity of item on x (this is where you can tell what is being sold)
- Make sure you can differentiate between a change in Demand and Supply (shift – things not having to do with price
change of the actual product) and change in quantity demanded and supplied (movement along because of price
change)
- Increase in D/S shift to the right
- Decrease in D/S shift to the left
-
In panel (a), there is a surplus. Because the market price of $2.50 is above the equilibrium price, the quantity supplied
(10 cones) exceeds the quantity demanded (4 cones).
Suppliers try to increase sales by cutting the price of a cone, and this moves the price toward its equilibrium level.
In panel (b), there is a shortage. Because the market price of $1.50 is below the equilibrium price, the quantity
demanded (10 cones) exceeds the quantity supplied (4 cones).
With too many buyers chasing too few goods, suppliers can take advantage of the shortage by raising the price.
Hence, in both cases, the price adjustment moves the market toward the equilibrium of supply and demand
d. Explain how prices serve as incentives in a market economy (pg. 140) – high prices are a signal for suppliers to
increase production and for consumers to buy less. Low prices are a signal for consumers to buy and suppliers to cut
back on production
SSEMI3 The student will explain how markets, prices, and competition influence economic behavior.
a. Identify and illustrate on a graph factors that cause changes in market supply and demand.
- Determinants of Demand (pgs. 86 – 88):
What Causes a Shift in Demand?
Consumer
Consumer Tastes and
Consumer Income
Population
Price of Related Goods
Expectations
Advertising
Income goes up,
If consumers think
Population increases
Consumer’s change
Complementary and
consumers will buy
that prices, economy, the number of
over time the things
Substitute items can
more shifting demand technology, etc., will
consumers and can
that they want. As
have an effect on
to the right. Goes
change in the future
shift demand to the
they change their
what consumers will
down, consumers will this will have an effect right. Decreases shift
tastes, their demand
purchase and increase
buy less shifting
on their consumption to the left
shifts to the right or
the demand for
demand to the left.
today.
the left
products.
-
Determinants of Supply (pgs. 116 – 120):
Effects of Rising
Costs
Input costs can
have a major
effect on the
production and
supply of goods
and services.
Gas prices can
limit the services
of a landscaper or
paper delivery
person.
Technology
Increases in the
ability to produce
because of
technological
advances can shift
the supply curve
to the right.
Breakdowns in
technology can
shift it to the left.
What Causes a Shift in Supply?
Subsidies
Taxes
Government
payments to firms
can act as an
incentive to
produce more,
which can affect
supply. If
government
removes subsidies
the curve will shift
left.
Government
taxation towards
firms can act as an
incentive to
produce, which
can affect supply.
If government
removes taxes the
curve will shift
left, increases
shift right.
Future
Expectations
How suppliers
view the future of
the economy will
affect their
production of
inventory today. If
they think the
economy is strong
they will increase
production today.
Vice versa.
Number of
Suppliers
Firms increase
whenever their
profit is to be
made. They
decrease
whenever profit is
reduced. Both will
shift the curve to
the right or the
left.
a. Explain and illustrate on a graph how price floors create surpluses and price ceilings create shortages.
-
Price floors are a legal minimum that a firm can pay for a good or service and can cause a surplus. Minimum wage is a
good example of a price floor.
Price ceilings are a legal maximum that a firm can charge for a good or service and can lead to shortages. Rent ceilings
and price gouging are good examples.
b. Define price elasticity of demand and supply
- Elasticity of demand (pg. 90) – is the responsiveness of the consumer to a price change in terms of quantity
demanded. If there is a big response, then it is considered elastic; small inelastic.
- Elasticity of supply (pg. 104) - is the responsiveness of the firm to a price change in terms of quantity
supplied. If there is a big response, then it is considered elastic; small inelastic.
SSEMI4 The student will explain the organization and role of business and analyze the four types of market structures in
the U.S. economy.
a. Compare and contrast three forms of business organization—sole proprietorship, partnership, and corporation (pgs.
185 – 200).
Three Major Economic Systems
a. Market. This is also called a capitalistic or free-market system. In a market system, private individuals and firms
control all resources and the price and quantity of all goods are determined by the interaction of demand and supply
in unrestricted, open markets. Ownership of property and goods is determined in the private sector and the
government does nothing to interfere with any market. Instead, this system relies on the belief that a market system
naturally leads to efficient results (called the “invisible hand”), which theoretically correct any inequalities in resource
allocation. Adam Smith used the phrase “invisible hand” in his 1776 book entitled Wealth of Nations. Even though his
book is as old as the United States, the theories he proposes are still relevant in today’s economy. The United States is
very market-oriented, but it is not a purely capitalistic system. One problem with market economies is that the
accumulation of wealth can be uneven. Under this system some people might become very rich while others might
remain poor. In the United States the government intervenes in the economy so that there is a mechanism to take
care of the poor. Poverty, however, is not the only problem that may emerge if the government is completely
uninvolved in markets. Other problems with unregulated activities include the elimination of competition (as
monopolies would be free to exist and expand), inefficient public services, and outright theft.
b. Command. A command economy is the opposite of a market economy. In this case the government commands all
markets, determining what to produce, how to produce, and for whom to produce. Centralized planning committees
take into account all the resources a nation has to offer (people, land, capital), and then set up an economic system to
produce this predetermined mixture of goods and services. Since the government is in charge of everything, citizens
should all receive equal amounts of basic goods and services. In theory, this means that there should be no problems
with high unemployment or poverty. In a command economy, the government is supposed to provide for its citizens.
A command economy may work in a simple society with only a small number of people. Yet today’s economies are
often too complex for a committee to decipher. For this reason, command economies often produce a set of goods
and services that is different from what its population really wants, leading to shortages of needed goods and
surpluses of others. Also, since there is no private ownership, people have little incentive to work hard. Because the
government manages all basic economic decisions in a command economy, personal liberties and freedom are not as
great as they are in a market economy. The former USSR was an example of a command-dominated economy. The
fact that this country collapsed economically has led many economists to question the long-term viability of command
economies.
c. Traditional. A traditional economy maintains a status quo, deciding that if something worked for one generation, it
can work for the next as well. The static nature of a traditional economy can allow it to continue for long periods, but
its inability to change can also stifle progress and economic growth. The global economy has rapidly changed over the
past hundred years and this has left many traditional economies far behind.
d. Mixed. While these three systems describe theoretical concepts of how an economy might function, in the real world
most economies blend two (or even all three) of these systems. For instance, while China is considered a command
economy, they have rapidly begun to incorporate many aspects of a market structure into their economy. Likewise,
while the United States is considered to have one of the most capitalistic economies in the world, the government still
intervenes in some markets. Therefore, there is a fourth economic system known as a Mixed economy. This is simply a
way of naming an economy that incorporates aspects from different economic systems.
b. Explain the role of profit as an incentive for entrepreneurs (pgs. 52-53) – profit is the primary goal of any
entrepreneur. It exists most plainly in a market-style economy and is the driving force for a capitalist system.
c.
Identify the basic characteristics of monopoly, oligopoly, monopolistic competition, and pure competition.
1) Monopoly (pg. 156)
a. One firm
b. Complete barrier to entry
c. Total control over price
d. One product
2) Oligopoly (pg. 169)
a. 2-3 firms
b. High barrier to entry
c. Control majority of output
d. Similar/identical products
3) Monopolistic Competition (pg. 166)
a. Many Firms
b. Few artificial barriers to entry
c. Slight control over price
d. Differentiated products
4) Perfect (Pure) Competition (pg. 151)
Four Conditions of Perfect (Pure) Competition:
a. Many Buyers and Sellers
b. Identical Products
c. Informed Buyers and Sellers
d. Free Market Entry and Exit