CHAPTER 7

Market Structures

Market Structures

Key Concept Economic Model Examine degree of competition

Why it Matters Major impact Competitive pricing

What is Perfect Competition?

Characteristics Economists classify markets based on how

competitive the are Market Structure-economic model of competition

within an industry Perfect Competition-ideal model of a market economy

Economists assess competitiveness of markets by were it falls short

Characteristics of Perfect Competition

1:Many Buyers and Sellers No Single Power Power of Choice Numerous

2:Standardized Product Standardized Product-one

producers product is identical to another’s

Perfect Substitutes Basic Commodities

3:Freedom Entry and Exit No Regulation

4:Independent Buyers and Sellers No Influence on Price Supply and Demand set

Equilibrium Independence ensure

competitiveness5:Informed Buyers and

Sellers Compare prices Seller is knowledgeable Price taker-seller that

accepts market price set by supply and demand

Competition in the Real World

Key Concepts No perfectly competitive markets Imperfect competition- market structures that lack

one or more of the conditions Some markets come close

The Characteristics of a Monopoly

Monopoly-market structure with one seller, no substitutes for a product

Cartel-organization of sellers that agree to set prices, limit output

Price Maker-business without competitors, can set prices

Barrier to Entry-obstacle to entering market ex: government regulations, size, resources, technology

3 Characteristics of Monopolies

1: Only One Seller Controls supply Da Beers Diamonds 20th Century

2: A Restricted, Regulated Market Government regulations create monopoly

3: Control of Prices Control prices because no close substitutes

Types of Monopolies

Natural Monopoly- cost of production lowest with only one producer

Government Monopoly- government owns and runs or permits only one producer

Technological Monopoly- one firm owns invention, technology, method

Geographic Monopoly- no other sellers within a region

Types of Monopolies

1:Natural Monopoly Inefficient competitors Economies of Scale- average production costs falls as production

grows Govt. Supports and Regulates

1:Government Monopoly Govt. runs some businesses

Postal Service

3:Technological Monopoly Patent- legal registration of invention; gives inventor sole rights Limited time

4:Geographic Monopoly Sports Teams Physical Isolation Very small market

Profit Maximization by Monopolies

Monopoly Cannot Set Prices too High Faces downward-sloping demand curve Raises equilibrium price by producing less than

competitive market wouldMost Countries Have Laws to Prevent

Monopolies

Vocabulary

Market Structure economic model of competition within an industry

Perfect Competition -ideal model of a market economy

Standardized Product one producers product is identical to another’s

Price Taker seller that accepts market price set by supply and demand

Imperfect Competition market structures that lack one or more of the conditions

Monopoly market structure with one seller, no substitutes for a product

Cartel organization of sellers that agree to set prices, limit output

Vocabulary

Price Maker business without competitors, can set prices

Barrier to entry obstacle to entering market ex: government regulations, size, resources, technology

Natural Monopoly cost of production lowest with only one producer

Government Monopoly - government owns and runs or permits only one producer

Technological Monopoly one firm owns invention, technology, method

Geographic Monopoly no other sellers within a region

Economies of Scale average production costs falls as production growsGovt. Supports and Regulates

Patent - legal registration of invention; gives inventor sole rightsLimited time