Unit 2 Economics
(w/ Supply & Demand)
TYPES OF BUSINESS
COMPETITION
PERFECT COMPETITION
many sellers of identical products
 businesses have no control over price and it is
easy for new businesses to enter the
competition
 the only real way to attract business is friendly
service and location or first come first serve
 examples include hay, corn, stocks

PERFECT COMPETITION
items sell for equilibrium price and businesses
are price takers
 consumers control the market and demand
dominates
 information about the products is known by all;
this includes other businesses and consumers

MONOPOLISTIC COMPETITION
many sellers of slightly different products
 businesses have little control over price and it
is easy for new businesses to enter the
competition
 the way to attract business is advertisement
 examples include jeans, tennis shoes,
resturants

MONOPOLISTIC COMPETITION
Broad price range for items in the same
category
 selling point is dependent and focused on
product differences
 Trying to become a monopoly

OLIGOPOLY
3-5 major sellers of slightly different products
 businesses have some control over price and it
is hard for new businesses to enter the
competition
 the way to attract business is branding
(attaching customer loyalty to your name)
 examples include candy, soda, cereal, cars

OLIGOPOLY
few sellers take in 80% of the revenue for the
industry
 businesses will try to block out competition by
offering lower prices or through legal tie ups
 businesses tend to copy or follow what all the
others do in product and pricing; they are
interdependent

MONOPOLY
one seller of a unique product
 businesses have almost total control over price;
it is very hard for new businesses to enter
 the way to attract business is sell an item that
is or seems inelastic (necessary)
 examples include electricity, water, diamonds

MONOPOLY
price can go up until people are unable
to pay at all
 illegal in most developed countries, including
the U.S. because it stops competition which
causes prices to go up and quality to decrease

MONOPOLY FORMATION



Type 1: patent or copyright - last for the short term as
you control the idea; most people sell their idea due to
an inability to implement because they do not have
the infrastructure
Type 2: own all the resources, example is De Beers
(own all the diamond mines in the world)
Type 3: economy of scale – scope of business is so
large that more than one business is not sustainable,
example is electric plant, these are government
regulated
Monopoly Problems
• Monopolies are bad because they
cause:
▫ higher prices
▫ lower quality
▫ less variety
Anti-Trust Laws
• created to
protect
consumers by
encouraging
competition and
choice
Sherman Act (1893)
• the first law against the formation of monopolies
• Vague – hard to enforce
• significant as the first move against the
monopoly power
Clayton Act (1914)
• made specific practices illegal:
▫ Interlocking Directory: person cannot sit on
board of directors of competing companies (Ex:
Ford and GM)
▫ Price Discrimination: all people charged same
price for same product
▫ Price Cutting: large corporation cannot sell at
below norm prices to drive the small business out
▫ Tying Contract: to buy one product you must
buy another item with it (Ex: mattress and bed
frame)
Mergers
• 2 or more companies combine into one larger
company
• another way companies can become monopoly
like
• mergers of very large companies must be
approved by the government (Federal Trade
Commission) to ensure competition
Types of Mergers
• Horizontal Merger: 2 or more companies of
the same type combine (Ex: AT&T and Cingular)
• Vertical Merger: combo of companies in the
same supply chain (Ex: publisher buying a
paper company)
• Conglomerate: combo of many different types
of companies (Ex: Johnson & Johnson who own
drug companies, equipment companies, baby
products, food)
CHECKING FOR UNDERSTANDING
1)
2)
3)
4)
As the number of sellers drops price control
increases. True or False
Which two types of competition have non-price
competition?
What is one similarity between perfect
competition and monopolistic competition?
What is one difference between an oligopoly
and monopolistic competition?
CHECKING FOR UNDERSTANDING
1)
2)
3)
4)
A monopoly can set any price it wants to, but
at some point they will begin to lose money.
True or False
What is one problem consumers face when a
store has a monopoly?
In which type of competition do prices go to
equilibrium always?
In which type of competition do the sellers
copy each other in style and pricing?