CHAPTER 7
Notes
SECTION 1 OBJECTIVES
 What you should know for this section:
• Explain the characteristics of perfect
competition.
• Understand the nature of monopolistic
competition.
• Describe
the
behavior
and
characteristics of the oligopolist.
• Identify several types of monopolies.
PERFECT COMPETITION
 Five conditions of a perfect competition:
• There should be a large number of buyers and
sellers.
• The products should be identical.
• Buyers and sellers should act independently.
• Buyers and sellers should be well informed.
• Buyers and sellers should be free to enter, conduct, or
get out of business.
PERFECT COMPETITION
Supply
and
demand
set
the
equilibrium price.
Each firm sets a level of output that
will maximize its profits at that price.
IMPERFECT COMPETITION
Imperfect competition refers to
market structures that lack one or
more of the five conditions of a
perfect competition.
IMPERFECT COMPETITION
Most firms and industries in
the US fall into the imperfect
competition classification.
IMPERFECT COMPETITION
Categories of imperfect
competition:
• Monopolistic competition
• Oligopoly
• Monopoly
MONOPOLISTIC COMPETITION
Monopolistic competition- has all conditions
of perfect competition EXCEPT identical
products
Product differentiation- real or imagined
differences between competing products in the
same industry
ADVERTISING
 List your favorite brand of:
•
•
•
•
•
•
Jeans
Shampoo
Perfume/ Cologne
Gasoline
Pain Reliever
Cereal
 Why did you make that particular choice of brand?
NON-PRICE COMPETITION
 Non-price competition- using advertisement, giveaways,
or other promotional campaigns to convince consumers that
their product is better than another brand
 Advertisement is used extensively in monopolistic
competition.
• Goal is to achieve a perceived difference in brands
• Prices can be increased over the competition’s price
if your product is seen as being better
PROFIT MAXIMIZATION
 The firm produces the quantity of output where the
marginal cost is equal to the marginal revenue.
 Prices can increase slightly for more revenue if
consumers are convinced that product is better.
 What happens if they charge too much????
OLIGOPOLY
Oligopoly- market structure in which a few very
large sellers dominate the industry.
• Differentiated (Ex. Automobile industry)
• Standardized (Ex. Steel industry)
EXAMPLES OF OLIGOPOLIES
 Soft drinks industry
• Pepsi
• Coca Cola
 Fast food industry
•
•
•
•
McDonalds
Wendy's
Burger King
Taco Bell
MONOPOLIES
Monopoly- only one seller of a
particular product
Companies that come closest to a
monopoly- telephone companies/ cable
companies
MONOPOLIES
Types of monopolies:
• Natural monopoly
• Geographic monopoly
• Technological monopoly
• Government monopoly
MONOPOLIES
Natural monopoly- costs of production are
minimized by having a single firm produce the
product
To avoid competition in some cases, the
government gives a company a franchise (exclusive
right to a certain area) without competition
SECTION 2
MARKET FAILURES
Competitive free enterprise economy works
when 4 conditions are met:
• Adequate competition
• Well informed buyers and sellers
• Resources free to move from one industry
to another
• Prices reflect cost of production
MARKET FAILURE
Most common market failures involve:
• Inadequate competition
• Inadequate information
• Resource immobility
• External economies
• Public goods
Occur on both demand and supply side of the
market
I NA D E Q UA T E C O M P E T I T I O N
Inefficient Resource Allocation
• Scarce resources are not used efficiently
Higher Prices and Reduced Output
• No competition means a company can create
“artificial shortages”
• Causes prices to go up
I NA D E Q UA T E C O M P E T I T I O N
 Economic and Political Power
• Companies influence politics by using economic
might
• They get their way or threaten to move the
company
 Both Sides of the Market
• Supply- market failure due to a monopolist
controlling supply
• Demand- market failure due to not having enough
buyers
I NA D E Q UA T E I N F O R M A T I O N
Market failure occurs when important
information is difficult to obtain by
buyers
RESOURCE IMMOBILITY
Land, capital, labor, and
entrepreneurships do not move to
markets where returns are the
highest. (Ex. Base closings)
EXTERNALITIES
 Know the difference between positive and negative
externality
• Negative- has a negative impact on a third party
who has nothing to do with the activity
• Positive- has a positive impact on a third party
who has nothing to do with the activity
 Example
• Airport (negative= noise for those living close by/
positive= employment)
PUBLIC GOODS
Normally provided by the government
The market fails at providing public goods
because they are geared to focus on individual
wants and needs versus collective needs
SECTION 3
S H E R M A N A N T I T RU S T A C T
Passed by Congress in 1890 to protect
trade and commerce against unlawful
restraint and monopoly.
It left loopholes, so it was not strong
enough.
C L AY TO N A N T I T RU S T A C T
Passed by Congress in 1914 to give
the government greater powers
against monopolies.
PUBLIC DISCLOSURE
Used to promote competition.
Due to government involvement,
the economy is a mixture of
different market structures.