7.1

Objectives
1.
2.
3.
Describe the four conditions that are in place in a perfectly competitive market.
List two common barriers that prevent firms from entering a market.
Describe prices and output in a perfectly competitive market.

Perfect Competition- a market structure in which a large number of firms all produce the same product.
I.
A.
Many Buyers and Sellers

B. Identical Products- there are no differences between the products sold by different suppliers i.
Commodity- a product that is the same no matter who produces it, such as petroleum, notebook paper, or milk

C. Informed Buyers and Sellers- know enough about the market to find the best deal

D. Free Market Entry and Exit i.
Firms must be able to enter markets when they will make money and exit them when they will lose money

II. Barriers to Entry
Imperfect Competition- a market structure that does not meet the conditions of perfect competition
A.
Start-Up Costs- the expenses a firm must pay before it can begin to produce and sell goods
B. Technology i.
Some markets require a high degree of technological know how

A.
i.
ii.
Efficiency is the primary characteristic of perfect competition
Prices correctly represent the opportunity cost of the product
Prices are the lowest sustainable price possible

Objectives
1.
2.
3.
Describe characteristics and give examples of monopoly.
Describe how monopolies are formed, including government monopolies.
Explain how a firm with a monopoly sets output and price, and why companies practice price discrimination.

I.
Monopoly- a market dominated by a single seller
II. Forming a Monopoly
A.
Economies of Scale- factors that cause a producer’s average cost per unit to fall as output rises

i.
Limited economies of scale- output will eventually rise as production rises ii. An industry that enjoys economies of scale can easily become a natural monopoly

B. Natural Monopolies- a market that runs most efficiently when one large firm supplies all of the output i.
Utilities

C. Technology and Change i.
Technology can cut fixed costs and make small companies as efficient as one large firm

III. Government Monopolies
A.
Patents- license that gives the inventor of a new product the exclusive right to sell it for a certain period of time

B. Franchises and Licenses i.
ii.
Franchise- the right to sell a good or service within an exclusive market
License- a govt issued right to operate a business

C. Industrial Organizations i.
The govt allows MLB and other sports organizations to restrict entry of teams

A.
The Monopoly’s Dilemma i. Monopoly still limited by the demand curve for the product

B.Falling Marginal Revenue i. Marginal revenue is lower than the price when the firm can control the price and cut it to sell more

V. Price Discrimination
A.Market power- the ability of a company to change prices and output like a monopolist

C. Targeted Discounts- Companies divide consumers into large groups and design pricing policies for each group i.
Rebates ii.
iii.
Senior citizen and students
Free for children

D. Limits of Price Discrimination
A.
B.
C.
Some market power
Distinct customer groups
Difficult resale

Objectives
1.
2.
3.
4.
Describe characteristics and give examples of monopolistic competition.
Explain how firms compete without lowering prices.
Understand how firms in a monopolistically competitive market set output.
Describe characteristics and give examples of oligopoly.

I.
A.
Monopolistic Competition i.
a market structure in which many companies sell products that are similar but not identical.
Examples: gas station, retail store

II. Four Conditions of Monopolistic
Competition
A.
B.
C.
D.
Many Firms- w/ a small investment, firms can begin to sell a product
Few artificial Barriers to entry
Slight Control over price i.
Differentiated Products differentiation

III. Nonprice Competition- A way to attract customers through style, service, or location, but not a lower price
A. Physical Characteristics

B. Location- some goods can be differentiated by
where they are sold
C. Service Level- higher prices can be charged if a firm offers a high level of service

D. Advertising, image, or status i. Advertising creates more of a perceived difference rather than a real one

IV. Price, Output, and Profits
A.
B.
Prices and output will be higher than in perfectly comp. markets but lower than monopolies
Profit is kept down by competition w/ other firms and the ease of entry into the market

V. Oligopoly- a market structure in which a few large firms dominate the market
A.
Barriers to Entry

B. Cooperation and Collusion i.
Price Leadership- w/o actually ‘cooperating’ to raise prices, firms will make it well known that they are going to raise prices and hope that others do as well ii.
Collusion- an agreement among firms to divide the market, set prices, or limit production
1. Price fixing- agreement to charge one price for the same good

C. Cartels- a formal organization of producers that agree to coordinate prices and production