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.