AGENDA Thurs 3/1 & Fri 3/2 QOD # 18: Risky Business (Worksheet) Chapter 6 Quiz: Business Orgs Perfect Competition Monopolies Stock Project Introduction HW: pg 176 #1-5; pg 184 #1-5 Stock Investment Ideas Chapter 7: Perfect Competition Characteristics of Perfect Competition Many buyers and sellers. All firms sell identical goods. Buyers and sellers have all relevant information about prices, product quality, and sources of supply. There is easy entry into the market and easy exit out of the market. Perfect Competition A market may not satisfy one or more of the four conditions and still be perfectly competitive What determines whether a market is perfectly competitive or not is if firms (sellers) in the market are price takers. Price Takers A price taker is a seller that can only sell its output at equilibrium price. A firm produces Q at which MR = MC at E (equilibrium price) Price takers will not sell for less than equilibrium. What does a perfectly competitive firm do? It produces where marginal revenue equals marginal cost. MR = MC It must sell its product at equilibrium since it is a price taker. Profit in a perfectly competitive market Profit acts as a signal to firms not in the market to enter the market. As new firms enter the market, they increase the supply of the good that is earning profit, and thus lower its price. Chapter 7.2: Monopoly Characteristics of monopoly There is one seller. Sells a product for which there is no close substitutes. Extremely high barriers to entry into the market. Barriers to Entry Legal Barriers public franchise: ex cable TV patent: 20 year exclusive rights to manufacture copyright: intellectual rights of authors, artists Extremely low per-unit costs so low that it keeps competition away natural monopoly Exclusive ownership of scarce resource A monopoly seller is not guaranteed profits. Price is limited by the demand curve for the product. Government & Market Monopolies government monopolies refer to monopolies that are legally protected from competition market monopolies refers to monopolies that are not legally protected from competition natural monopolies exists when there is only one seller due to low average total cost. The monopoly firm is a price searcher. The price searcher can choose from various prices. The monopoly firm will produce where MR=MC. Will charge the highest possible price that it can sell all its output. Searches for the best price through trial and error.