Chapter 7 Vocabulary

Competition

and

Market Structures

• Laissez-faire• The philosophy that government

should not interfere with business. (French word meaning allow them to do)

  • A good example is the Danish

government, the Danish can smoke marijuana and are allowed open prostitution and other things that other democratic and autocratic governments could not do.

• Market structure

• The degree of competition among firms operating in the same industry.

• Perfect competition (market structure 1)

• A large number of well-informed buyers and sellers who exchange products.

• The agriculture industry is the most commonly used example of perfect competition.

• There are a large number of buyers and sellers in a massive market.

• It is easy to buy a farm and equally easy to sell it.• Farmers know the current market prices for

agricultural goods as they are frequently published.• Farmers produce a range of homogeneous goods.

• Monopolistic competition (market structure 2)

• The competitor tries to attract more customers and monopolize a small portion of the market.

• After driving the Model S onto the stage, Musk exited his seven-passenger sedan along with seven other occupants (and their luggage), three from decidedly unconventional spaces: two children climbed out of optional rear-facing bucket seats and through the rear hatch, and a surprising eighth guy popped out from beneath the hood carrying a backpack. Check out the video:

• Product differentiation

• Differences between competing products in the same industry. (examples: shoes, computers, store location, store design, manner of payment, packaging)

• Nonprice competition

• The use of advertising, giveaways, or other promotional campaigns to convince buyers that the product is better than other brands. (this takes the place of price competition. Monopolistic competitors usually advertise heavily to make their products seem different from everyone else’s.

• Oligopoly (market structure 3)

• A few very large sellers dominate the industry. (examples: Pepsi, Coke, McDonald’s, Burger King, Wendy’s)

• The automobile industry in the United States is an oligopoly because only six firms (General Motors, Ford, Chrysler, Honda, Toyota, and Nissan) account for almost 90% of U.S. automobile sales.

•Collusion

•A formal agreement to set prices or behave in a cooperative manner.

• Price-fixing (a form of collusion)• Agreeing to charge the same or

similar prices for a product.• These prices are higher than

those determined under competition.

• Collusion is usually against the law.

• Monopoly (market structure 4)

• One seller of a product.• Very few if any exists.• We usually dislike monopolies and we try to

outlaw them.• New technologies often introduce products

that compete with existing monopolies. Fax machine competes with the post office. Then they both compete with e-mail.

• Microsoft had established first MS-DOS and later Windows as the dominating operating system for personal computers. Once it had achieved a position of strength in the market, would-be competitors faced insurmountable hurdles. Software developers face large costs for every additional operating system to which they adapt their applications. Because Microsoft had the dominant operating system, any rival personal computer operating system would have only a handful of applications, compared to tens of thousands of applications for Microsoft's Windows system.

•Externality

•Unintended side effect that either benefits or harms a third party not involved in the activity that cause it.

• Negative externality

• The harm, cost, or inconvenience suffered by a third party because of actions by others.

• The noise and inconvenience people suffer when an airport expands.

• Positive externality

• A benefit received by someone who had nothing to do with the activity that generated the benefit.

• Someone living on the other side of town benefits from the additional jobs generated by the airport.

• Public goods (supplied by the government)

• Products consumed by everyone, and whose use by one individual does not diminish the satisfaction to others.

• Example: police and fire protection, national defense.

• Shows that the market is good at satisfying individual wants and needs while it may fail to satisfy them on a collective basis.

• Public disclosure• The requirement that

businesses reveal information to the public.

• FDA labels on food and medicine.