Economics Chapter 7Competition

Perfect CompetitionsPerfect competition is when a large number of buyers and

sellers exchange identical products under 5 conditions (see pg. 154)

1. There should be a large number of buyers and sellers

2. The products should be identical

3. Buyers and sellers should act independently

4. Buyers and sellers should be well-informed.

5. Buyers and sellers should be free to enter, conduct, and/or get out of business.

More on Perfect Competition

Under PERFECT COMPETITION, supply and demand set the equilibrium price, and each firm sets a level of output that will maximize its profits at that price.

IMPERFECT COMPETITION refers to market structures that lack one or more of the five conditions of perfect competitions.

Imagine our local open farmers’ markets during the spring and summer. How might these markets meet each condition for a perfectly competitive market?

Monopolistic CompetitionMeets all conditions of perfect competition except for

identical product.

Uses product differentiation – the real or imagined differences between competing products in the same industry.

Uses nonprice competition, the use of advertising giveaways, or other promotional campaigns to differentiate their products from similar products.

Sell within a narrow price range but try to raise the price within that range to achieve profit maximization.

What are some examples of how jean companies differentiate their products?

OligopolyOligopoly is a market structure in which a few very large

sellers dominate the industry.

Oligopoly is further away from perfect competition (freest trade) than monopolistic competition.

Oligopolists act interdependently by lowering prices soon after the fest seller announces the cut, but typically they prefer nonprice competition because their rivals cannot respond as quickly.

Oligopolists may all agree formally to set prices, called collusion, which is illegal (because it restricts trade).

1. Price-fixing – agreeing to charge a set market price, often above market price

2. Dividing up the market for guaranteed sales.

Oligopoly continued

Oligopolists can engage in price wars, or a series of price cuts that can push prices lower than the cost of production for a short period of time.

Oligopolists’ final prices are likely to be higher than under monopolitic competition and much higher than under perfect competition.

Why do you suppose oligopolists rarely protest when a rival raises its prices?

MonopolyMonopoly is a market structure with only one seller of a

particular product.

The U.S. has few monopolies because Americans prefer competitive trade.

Natural monopoly occurs when a single firm produces a product or provides a service because it minimizes the overall costs (public utilities)

Geographic monopoly occurs when the location cannot support two or more of some type of business (ex: small town drugstore)

Technological monopoly occurs when a producer has the exclusive right through patents or copyrights to produce or sell a particular product (an artist’s work for his lifetime plus 50 years)

Monopoly continued

Government monopoly occurs when the government provides products or services that private industry cannot adequately provide (uranium processing)

The monopolist is often larger than a perfect competitor, allowing it to be the price maker versus the price taker.

(See comparison chart and graph on pages 159-160)

Why are monopolies unappealing to Americans?

Inadequate CompetitionDecreases in competition because of mergers and

acquisitions can led to several consequences that create market failures.

Inefficient resource allocation often results when there’s no incentive to use resources carefully.

Reduced output is one way that a monopoly can retain high prices by limiting supply.

A large business can exert its economic power over politics.

Market failures on the demand side are harder to correct than failures on the supply side.

Imagine you are on a city council and a leading auto maker that employs thousands demands a reduced tax rate or it will relocate. What alternatives might you suggest besides granting or refusing the tax break?

Inadequate InformationConsumers, businesspeople, and government officials must

be able to obtain market conditions easily and quickly.

If they cannot, it is an example of market failure.

What resources would you check to find out how the weather has affected the citrus industry this year?

Resource Immobility

Resource immobility occurs when land, capital, labor, and entrepreneurs stay within a market where returns are slow and sometimes remain unemployed.

When resources will not or cannot move to a better market, the existing market does not always function efficiently.

What is unrealistic about the condition of resource mobility in an ideal free enterprise system?

ExternalitiesExternalities are unintended side effects that either

benefit or harm a third party.

Negative externalities are harm, cost, or inconveniences suffered by a third party.

Positive externalities are benefits received by someone who had nothing to do with the activity that created the benefit.

Externalities are market failures because the market prices that buyers and sellers pay do not reflect the costs and/or benefits of the action.

Should parents pa an extra fee when they purchase a ticket for their young child?

Public Goods

Public goods are products everyone consumes

The market does not supply such goods because it produces only items that can be withheld if people refuse to pay for them; the need for public goods is a market failure.

Which of the 4 conditions of a competitive free market economy does the need for public goods fail to meet?

Public Disclosure

Public disclosure requires businesses to reveal information about their products or services to the public.

The purpose of public disclosures is to provide adequate information to prevent market failures.

Corporations, banks, and other lending institutions must disclose certain information. There are also “truth-in-advertising” laws that prevent sellers from making false claims about their products. (see chart pg. 171)

WHAT ARE SOME EXAMPLES OF PUBLIC DISCLOSURE?

Indirect Disclosure

Indirect disclosure includes government’s support of the Internet and the availability of government documents on government Web sites.

Businesses post information about their about their own activities on their own Web sites.

How can consumers utilize the Internet before making a purchase?

Modified Free Enterprise

Government intervenes in the economy to encourage competition, prevent monopolies, regulate industry, and fulfill the need for public goods.

Today’s U.S. economy is a mixture of different market structures, different kinds of business organizations, and varying degrees of government regulation.

How does government regulation help prevent businesses from seeking economic gain at the expense of other citizens?