Market Structures
Ch. 7
Consider
• Chapter 7: Market Structure
 What does a bushel of wheat have in common with a
share of Microsoft stock?
 What’s so perfect about perfect competition?
 Why don’t more monopolies last?
 Why are some panty hose sold in egg-shaped cartons?
 Why was OPEC created?
 Is the U.S. economy more competitive now than it used
to be?
Objectives
• Ch 7 : Perfect Competition & Monopoly
– SWBAT,
Distinguish the features of perfect
competition.
Describe the barriers to entry that can create
a monopoly.
Compare and contrast the market structures
of monopoly and perfect competition in terms
of efficiency.
Key Terms
•
•
•
•
•
•
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Market structure
Perfect competition
Commodity
Monopoly
Barriers to entry
Start-up costs
Market power
 Market structure – important features of a
market, including the number of buyers and
sellers, product uniformity across sellers, ease of
entering the market, and forms of competition
 Perfect competition – a market structure with
many fully informed buyers and sellers of an
identical product and ease of entry
 Commodity – a product that is identical across
producers
Example Markets w/ Perfect
Competition (at least close examples)
Trading of stocks
Foreign exchange markets
Trading of agricultural products
Market Structure
Market Feature
Questions to Ask
1. Number of buyers
and sellers
Are there many, or only a few, or just one?
2. Product’s uniformity Do firms in the market supply identical products, or
across suppliers
are products differentiated across firms?
3. Ease of entry into
the market
Can new firms enter easily, or do natural or artificial
barriers block them?
4. Forms of
competition among
firms
Do firms compete based only on price, or are
advertising and product differences also important?
Market Price & Output
• The market price is determined by the
intersection of the market demand curve and
the market supply curve.
• Perfectly competitive markets are efficient
– Competition keeps prices & production costs low
– Prices correctly represent the opportunity cost of
each product
Market Equilibrium &
a Firm’s Curve in Perfect Competition
Objective Reflection
• Ch 7 : Perfect Competition & Monopoly
– SWBAT,
Distinguish the features of perfect
competition.
Sec 2: Monopoly
Monopoly – exists when the sole supplier of a
product with no close substitutes
Market power – the ability of a firm to raise
its price without losing all sales to rivals
Barriers to Entry create Monopolies
1. Start-up costs
–
Low start-up costs mean many entrepreneurs can enter the market
•
•
•
–
Restaurants
Convenience stores
Hair & Nail salons
High start-up costs limit the number of entrepreneurs that can start
a competitive business
•
•
Technology, knowledge, or skill can add to start-up costs
–
Computer industry
–
Carpentry
–
Plumber
High Fixed costs can add to start-up costs
– Airlines
– Automobiles
Barriers to Entry create Monopolies
2. Economies of Scale (p. 157)
Without Economies of Scale
With Economies of Scale
ATC
Barriers to Entry create Monopolies
3. Government create legal restrictions
– Patents
•
Drug companies most obvious example
– Franchise
•
Can you think of one in this school? (At least for
freshmen, sophomores, and juniors)
– License
•
TV & radio
4. Control of essential resources
– OPEC
Monopolists may not earn a profit
• Although a monopolist is the sole producer of
a good with no close substitutes, the demand
for that good may not be great enough to
keep the firm in business.
True Monopolies are Rare
• A profitable monopoly attracts competitors &
substitutes
• Examples
Railroads – trucking industry
Local Cable TV service – satellite TV
Local phone service – wireless & internet
U.S. Postal Service – fax machines, email, FedEx,
UPS
Monopoly & Efficiency
• Not guaranteed a profit
• Can lose money
• Relatively rare
Monopoly vs. Perfect Competition
Competition forces firms to be efficient and to
supply the product at the lowest possible
price
Monopolies may grow inefficient
A monopoly will charge a higher price than
competitive firms
With monopoly, consumer surplus shrinks,
and is much smaller than consumer surplus
with perfect competition.
Monopoly Might Not Be So Bad
•
•
•
•
Economies of Scale
Government Regulation
Keeping prices low to avoid regulation
Keeping prices low to avoid competition
Objective Reflection
• Describe the barriers to entry that can create
a monopoly.
Sec 3 Monopolistic Competition &
Oligopoly
• Key Terms:
– Monopolistic competition
– Differentiation
– Nonprice competition
– Oligopoly
– Price war
– Collusion
– Price fixing
– Cartel
• Monopolistic Competition Characteristics
– Many firms
– Few artificial barriers to entry
– Slight control over price
– Differentiated products
Comparison of Market Structures
p. 170
Perfect
Competition
Monopolistic
Competition
Oligopoly
Monopoly
# of Firms
Many
Many
A few
dominate
One
Variety of
goods
None
Some
Some
None
Control over
prices
None
Low
Some
Complete
Barriers to
entry
None
Low
High
Complete
Examples
Wheat, shares
of stock
Jeans, books
Cars, movie
studios
Public water
companies
Objective Reflection
• Compare and contrast the market structures
of monopoly and perfect competition in terms
of efficiency.
Unique to
Monopolies
Unique to
Oligopolies
Similarities
Monopoly
Oligopoly
Unique to
Perfect Competition
Perfect
Competition
Unique to
Monopolistic
Competition
Similarities
Monopolistic
Competition