bellwork 1. which of the following is not a condition for perfect competition? (1) many buyers and...
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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
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
Determinants of market structureFreedom of entry and exitNature of the product – homogenous (identical), differentiated?
Control over supply/outputControl over priceBarriers to entry
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
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
E.Q: Describe the characteristics and give examples of each market structureE.Q: Describe the characteristics and give examples of each market structure
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
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**
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.
E.Q: Describe the characteristics and give examples of each market structureE.Q: Describe the characteristics and give examples of each market structure
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
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**
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
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 oligopolistic structures: Supermarkets Banking industry Chemicals Oil Medicinal drugs Automotive
E.Q: Describe the characteristics and give examples of each market structureE.Q: Describe the characteristics and give examples of each market structure
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**
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**
Monopoly:Pure monopoly – industry is the firm!Actual monopoly – where firm has >25%
market shareNatural Monopoly – high fixed costs – gas,
electricity, water, telecommunications, rail
E.Q: Describe the characteristics and give examples of each market structureE.Q: Describe the characteristics and give examples of each market structure
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.
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**
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
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**
Monopoly:High barriers to entryFirm controls price OR output/supplyAbnormal profits in long runPossibility of price discriminationConsumer choice limitedPrices in excess of MC
E.Q: Describe the characteristics and give examples of each market structureE.Q: Describe the characteristics and give examples of each market structure
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.
E.Q: Describe the characteristics and give examples of each market structureE.Q: Describe the characteristics and give examples of each market structure
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