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