BELLWORK 1. Which of the following is NOT a condition for perfect competition? (1) many buyers and...

BELLWORK

1. Which of the following is NOT a condition for perfect competition?

(1) many buyers and sellers participate(2) identical products are offered(3) market barriers are in place(4) buyers and sellers are well-informed about goods and services

2. How does a perfect market influence output?(1) Each firm adjusts its output so that it just covers all of its costs.(2) Each firm makes its output as large as possible even though

some goods are not sold.(3) Different firms make different amounts of goods, but some

make a profit and others do not.(4) Different firms each strive to make more goods to capture

more of the market.

7.2 AND 7.3MARKET STRUCTURES

E.Q: Describe the characteristics and give examples E.Q: Describe the characteristics and give examples of each market structureof each market structure

MARKET STRUCTURES

Type of market structure influences how a firm behaves:

Pricing Supply Barriers to Entry Efficiency Competition

E.Q: Describe the characteristics and give examples of each market structureE.Q: Describe the characteristics and give examples of each market structure

SWS 2006 4

Markets are classified by 44 structures

1. Pure (perfect) Competition1. Pure (perfect) Competition

2. Monopolistic Competition2. Monopolistic Competition

3. Oligopoly3. Oligopoly

4. Monopoly4. Monopoly

Comparison of Market Structures

Number of firms

Variety of goods

Control over prices

Barriers to entry and exit

Examples

Perfect Competition

Many

None

None

None

Wheat,shares of

stock

Monopolistic Competition

Many

Some

Little

Low

Jeans,books

Oligopoly

Two to four dominate

Some

Some

High

Cars,movie studios

Monopoly

One

None

Complete

Complete

Public water

COMPARISON OF MARKET STRUCTURES

Markets can be grouped into four basic structures: perfect competition, monopolistic competition, oligopoly, and monopoly


MARKET STRUCTURE

Determinants of market structureFreedom of entry and exitNature of the product – homogenous (identical), differentiated?

Control over supply/outputControl over priceBarriers to entry


SWS 2006

THE 5 CONDITIONS OF PERFECT COMPETITION

1)1) LARGELARGE number of number of SMALLSMALL firms. firms. No single buyer or seller can influence the price.No single buyer or seller can influence the price.

2)2) Buyers and sellers deal in Buyers and sellers deal in identicalidentical products. No products. No product differences. product differences. (EXAMPLES: Salt, Flour, (EXAMPLES: Salt, Flour, Commodity, Corn)Commodity, Corn)

3)3) Unlimited Competition:Unlimited Competition: so many firms, that so many firms, that suppliers lose the ability to set their own price.suppliers lose the ability to set their own price.

4)4) No Barriers to EntryNo Barriers to Entry. Sellers are free to enter the . Sellers are free to enter the market, conduct business and free to leave the market, conduct business and free to leave the market. (Low cost to enter)market. (Low cost to enter)

5)5) Each firm is a Each firm is a PRICE-TAKERPRICE-TAKER (more on this later)(more on this later)CONSUMERS HAVE THE LARGEST SELECTION OF BUYERS TO BUY GOODS FROM BECAUSE NO SINGLE GOOD IS MORE APPEALING THAN ANOTHER.E.Q: Describe the characteristics and give examples of each market structureE.Q: Describe the characteristics and give examples of each market structure

MARKET STRUCTURE

Examples of perfect competition:

Financial markets – stock exchange, currency markets, bond markets

Agriculture


MONOPOLISTIC COMPETITION

1)1) LARGELARGE number of large companies number of large companies (but fewer than perfect (but fewer than perfect competition).competition). Sellers can influence the price through creating a Sellers can influence the price through creating a product identityproduct identity (more on this later)(more on this later)

2)2) Products are Products are NOT exactly identicalNOT exactly identical, , BUT VERY SIMILAR,BUT VERY SIMILAR, so companies so companies use use PRODUCT DIFFERENTIATIONPRODUCT DIFFERENTIATION

3)3) Heavy Competition:Heavy Competition: Firms must remain aware of their competitor’s Firms must remain aware of their competitor’s actions, but they each have some ability to control their own prices.actions, but they each have some ability to control their own prices.

4)4) Low Barriers to Entry:Low Barriers to Entry: harder to get started because of the amount of harder to get started because of the amount of competition.competition.

5)5) Monopolistic competition takes its name and its structure from Monopolistic competition takes its name and its structure from elements of elements of monopolymonopoly and and perfect competitionperfect competition..

The 5 conditions of Monopolistic Competition


**MARKET STRUCTURE**

Imperfect or Monopolistic Competition

Many buyers and sellersProducts differentiatedRelatively free entry and exitEach firm may have a tiny ‘monopoly’ because of the differentiation of their product

Firm has some control over priceExamples – restaurants, jeans, shampoos, shoes professions –plasterers, plumbers, etc.


WHAT IS AN OLIGOPOLY?A market in which a two-three large sellers A market in which a two-three large sellers control most of the production of a good or control most of the production of a good or

service and they work together on setting prices.service and they work together on setting prices.

Conditions of an Conditions of an OligopolyOligopoly1)1) Very Very fewfew Sellers that control the entire market. Sellers that control the entire market.

2)2) Products may be differentiated or identical Products may be differentiated or identical (but (but they are usually standardized)they are usually standardized)

3)3) Medium barriers to entry:Medium barriers to entry: Difficult to Enter the Difficult to Enter the market because the competitors work together market because the competitors work together to control all the resources & prices.to control all the resources & prices.

4)4) The actions of The actions of oneone affects affects allall the producers. the producers.

5)5) Potential for Potential for CollusionCollusion



Oligopoly – Competition amongst the few

Industry dominated by small number of large firmsMany firms may make up the industryMedium to High barriers to entryProducts could be highly differentiated – branding or homogenous

Non–price competitionPotential for collusion?Abnormal profitsHigh degree of interdependence between firms


MARKET STRUCTURE

Examples of oligopolistic structures: Supermarkets Banking industry Chemicals Oil Medicinal drugs Automotive


Oligopoly describes a market dominated by a few large, profitable firms.

CollusionCollusion is an agreement among

members of an oligopoly to set prices and production levels.

Price- fixing is an agreement among firms to sell at the same or similar prices.

CartelsA cartel is an association by

producers established to coordinate prices and production.

**OLIGOPOLY**



Monopoly:Pure monopoly – industry is the firm!Actual monopoly – where firm has >25%

market shareNatural Monopoly – high fixed costs – gas,

electricity, water, telecommunications, rail


A government monopoly is a monopoly created by the government.

**GOVERNMENT MONOPOLIES**

Technological Monopolies The government grants patents, licenses that give the inventor

of a new product the exclusive right to sell it for a certain period of time.

Franchises and Licenses A franchise is a contract that gives a single firm the right to sell

its goods within an exclusive market. A license is a government-issued right to operate a business.

Industrial Organizations In rare cases, such as sports leagues, the government allows

companies in an industry to restrict the number of firms in the market.



Advantages and disadvantages of monopoly:

Advantages:May be appropriate if natural monopolyEncourages innovationDevelopment of some products not likely without some guarantee of monopoly in production

Economies of scale can be gained – consumer may benefit



Monopoly:High barriers to entryFirm controls price OR output/supplyAbnormal profits in long runPossibility of price discriminationConsumer choice limitedPrices in excess of MC


Disadvantages:Exploitation of consumer – higher pricesPotential for supply to be limited - less choicePotential for inefficiency –

A monopolist sets output at a point where marginal revenue

is equal to marginal cost.

Setting a Price in a Monopoly

Market Price $11

$3

Pri

ce9,000Output

(in doses)

Marginal Cost

Demand

Marginal Revenue

B

C

A

**OUTPUT DECISIONS**Even a monopolist faces a

limited choice – it can choose to set either output or price, but not both.

Monopolists will try to maximize profits; therefore, compared with a perfectly competitive market, the monopolist produces fewer goods at a higher price.


DISCUSSION

Oligopolistic firms often work together to form a monopoly, by agreeing to set prices and production levels…the government try to regulate against this…why?

ASSIGNMENT

Page 164 #1-4

Page 171 #1-5

BELLWORK 1. Which of the following is NOT a condition for perfect competition? (1) many buyers and...

Documents

Transcript of BELLWORK 1. Which of the following is NOT a condition for perfect competition? (1) many buyers and...