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Unit 7B: Explain how changes in the level of competition can affect price and output levels.

Unit 7B: Explain how changes in the level of competition can affect price and output levels. . MARKET BASICS: Four Conditions for Perfect Competition- 1: Efficient market 2: Price and production are low. A: Market- a place where goods and services are bought and sold.

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Unit 7B: Explain how changes in the level of competition can affect price and output levels.

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  1. Unit 7B: Explain how changes in the level of competition can affect price and output levels. MARKET BASICS: Four Conditions for Perfect Competition- 1: Efficient market 2: Price and production are low. A: Market- a place where goods and services are bought and sold. 1. Market price= the price paid by the buyer and accepted by the seller. 2. Perfect competition: 4 conditions; Many buyers & sellers in the marketplace Sellers offer identical products. A commodity is a product that is considered the same regardless of who makes or sells it. Buyers and sellers are well informed about products. Sellers are able to enter and exit market.

  2. B: IMPERFECT COMPETITION: Creates barriers to enter into a market. • High start up costs. • Government regulations: restrictions on trade, environmental restrictions, taxes. • Brand identity: Too many products that are similar, offer choices to consumers and weaken consumer loyalty.

  3. Monopoly- a market w/ single supplier • Natural –market runs efficiently provides all output ( electric companies, water companies) • Government – created by govt. ( patent, franchise, license - Major League Baseball –all professional sports. • Oligopoly- market dominated by a few large, profitable firms. 4 largest firms produce at least 90% of output- air travel, breakfast cereals, household appliances. • Dangers- collusion, price fixing, price war –illegal in America (OPEC) is an example on the world market.

  4. 3. NON-PRICE COMPETITION-competition through ways other than lower prices. • Quality, style, color, size, shape, texture, taste. • Location • Special Service • Branding, image, or status

  5. 4. Regulation and Deregulation • Predatory pricing –selling a product below cost to drive competitors out of the market • Regulate business practices-anti-trust laws (bust up monopolies. • Block Mergers-stop two or more companies from forming one company. • Horizontal mergers- companies which produce same product in same market. ( Exxon and Mobil joined became Exxon-Mobil. Goodrich and Michelin merged now just Michelin Tire) • Vertical merger- two companies at different levels or stages of production join. ( A tire company and a car company, a grocery store chain buys a dairy-the firm produces and sells the milk)

  6. 4. Continued • Conglomerates-companies of unrelated products join together. Walt Disney, GE, Johnson and Johnson • Multi-national corporation.-worldwide corporation-jobs but may influence culture. Walt Disney fits both categories so does Coca-Cola.

  7. Types of Businesses • Sole Proprietorships: Business owned by a single person or a married couple. 75% of businesses in the US are proprietorships. • Advantages: full control, sole receiver of profits, easy to start. • Disadvantages: limited access to physical capital, unlimited liability= must pay for all of the firm’s losses.

  8. Partnerships: Two or more owners • Advantages: Owners share the income and losses. • Disadvantages: limited liability-both partners share in liability. • In a limited partnership one partner may bear the brunt of losses. In equal partnership both bear equally. • Advantage: Shared decision making, specialization and larger pool of capital.

  9. Corporation: Several people come together and pool resources to form a corporation. • Advantage: The company is one entity: the company is the one that bears the liability. • Corporations act as individuals • Disadvantage: owner has no control: Decisions are based on Board of Directors, CEO and others who make up corporate board.

  10. 1. Owners receive stock in return for investment in company. Each share of ownership is interest in the company. • 2. The stock holder receives one share on income paid out by the corporation or a dividend. • 3. Corporations also raise capital by selling bonds or money the firm owes to people who lend it money. • 4. Both stocks and bonds can be bought and sold in the stock markets. • 5. The decisions made in the company on long term goals for the corporation are made by the Board of Directors. They hire a CEO, and President to run day to day operations of the business.

  11. Franchise • Franchises are not a form of business but a license to operate as another business. The owner of a franchise has partial ownership but so does the parent company. • What is financial capital?

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