Chapter 7: Market Structures

1. Chapter 7: Market Structures S1: Perfect Competition S2: Monopoly S3: Monopolistic Competition and Oligopoly S4: Regulation and Deregulation

2. Bell Work • Grab workbook pages • 3 hole punch and put in folder • Answer the Ch. 7 Warmup • A-C

3. S1: Market Structures • “What are the characteristics of Perfect competition?” • Objectives • 4 conditions of a perfectly competitive market • 2 common barriers that prevent firms from entry • Prices/output in perfectly competitive market • Key terms • http://www.pearsonsuccessnet.com/snpapp/iText/products/0-13-369833-5/Flash/Ch07/Econ_OnlineLectureNotes_ch7_s1.swf

4. Introduction • Characteristics of perfect competition? • Many buyers/sellers • Identical products • Informed buyers/sellers • Free market entry/exit

5. Perfect Competition • Simplest market structure • Also called pure competition • Perfectly Competitive Market: • Large # of firms • Firms producing same products • Assumes market is in equilibrium • Assumes firms sell same product at same price

6. Conditions of Perfect Competition • Only few perfectly competitive markets • Tough b/c markets must meet 4 strict conditions • Many buyers/sellers participating in market • No 1 person/firm can be too powerful so to influence total market qty. or price • Sellers offering identical products • No difference in products sold: gas, paper, sugar. • Buyers/sellers well-informed about products • Market provides plenty of info to buyers. Understand features, price, and other info about product • Sellers are able to enter/exit market freely • Very easy to enter/exit a perfect market • Entrance when popular; exit when demand decreases

7. Barriers To Entry • Barriers lead to imperfect competition • Barriers can include: • Start-up costs: • When start-up costs are high it is more difficult for new firms to enter market • Markets w/high start-up costs are less likely to be perfectly competitive. • Technology • Markets that require high degree of technical knowledge can be difficult to enter into w/out preparation and stu

8. Price and Output • Perfectly competitive markets are efficient and competition keeps both prices/production costs low. • Prices (in PC Market) correctly represent the opportunity costs of each product • Also provide the lowest sustainable prices possible. • Output • B/c of PC Market, no supplier can greatly influence prices. Producers make their decisions based on most efficient use of resources.

9. Lesson Closing • Pearsson Resources • Visual Glossary • Action Graph: Market Equilibrium • “Exit Pass” • Critical Thinking; 8-10 • Also have answers for tomorrow • Workbook Work • Chapter Work pgs. 57 and 131 • Identifying Perfect Competition worksheet

10. 7.2: Monopoly BW: Refresh self on Critical thinking 8-10 pg. 163 Finish workbook work….

11. Critical Thinking • Which markets are close to Perfect competition • Paper clips and white socks • Commodities? • Products same regardless of producer • Why must PC markets always deal in commodities? • Products must be identical, buyers will not pay more for one producers good • What would happen today? • Buyers would make decisions based on differences b/t products • Barriers to entry • Factors that make it difficult to enter a market • 2 other specific examples • Difficulty in finding raw materials, difficulty in finding workers

12. 7.2: Market Structures • “Characteristics of a monopoly?” • Objectives • Characteristics/examples of a monopoly • How monopolies, including govt., are formed • How firm w/monopoly makes output decisions • Why monopolists sometimes practice price discriminations • Key Terms • http://www.pearsonsuccessnet.com/snpapp/iText/products/0-13-369833-5/Flash/Ch07/Econ_OnlineLectureNotes_ch7_s2.swf

13. Introduction • What are characteristics of a Monopoly? • Single Seller • Many barriers to entry for new firm • No variety of goods • Complete control of price

14. Characteristics of a Monopoly • Characteristics • Single seller in market • Many barriers to entry • Supply unique product w/no close substitute • Having market cornered • Change high prices • Quantity of goods lower than in competitive market

15. Forming a Monopoly • Economies of Scale • Different market conditions create different types of economies • Some monopolies enjoy this • Characteristics that cause a producers av. Cost to drop as production rises • Natural Monopolies • Market that runs most efficiently when one large firm provides output • Public water is an example • If it wasn’t a natural we would use too much, and be inefficient • Technology can destroy a natural monopoly. Read pg.166 • Can cut fixed costs to make small companies compete w/large firms

16. Forming a Monopoly • Govt. actions that lead to monopolies • Issuing a patent: gives exclusive rights to sell good/service • Granting a franchise: gives single firm right to sell its goods w/in an exclusive market • Issuing a license- allows firms to operate a business, especially where scarce resources are involved • Restricting number of firms in a market

17. Output Decisions: • Monopolists Dilemma: Choose PRICE or OUTPUT • They think BIG PICTURE to maximize profits • Produce fewer goods @ higher prices • Can be viewed in terms of demand • Buyers will demand more of a good @ lower prices • BUT the more a monopolist produces, the less they will receive in profits. • Falling Marginal Revenue • Key difference in PCs and Monopolies • PCs marg. Rev.= price, each firm receives same price no matter production • Not true for monopolies

18. Output Decisions: • Setting a Price • Marginal revenue is lower than market price in monopolies • Setting a Price Action Graph • Question: Where does a monopolist usually set output and price compared to PC market? • Monopolist sets output lower and price higher than seller in a PC market

19. Price Discrimination • Many cases the monopolist charges the same price to all customers • Some instances they don’t: Called Price Discrimination • Idea that each costumer has a maximum price that he/she will pay for a good • Targeted Discounts: targeting particular groups • Discounted airline fares • Senior citizens/students • Children promotion • Limits: must me 3 conditions • Firms must have market power • Customers divided into distinct groups • Buys must not be in a position in which they can easily resell good/service.

20. Lesson Closing • Pearsson Success • Economies of scale graph • Setting a price action Graph • Demand schedule for Breathedeep Graph • Case Study: Book/Video • Monopoly: Chart Skills • “Exit Pass” • Critical Thinking 8-11

21. Bell Work Finish Critical Thinking: Watch Competition Video Workbook Pg. 58, 138 “Perfect Competition”

22. Ch. 7.3 • “What are the characteristics of monopolistic competition and oligopoly?” • Objectives • Characteristics/Examples of monopolistic competition • How Firms compete w/out lowering prices • How firms in monopolistic competitive market set output • Characteristics/examples of an oligopoly • Key Terms • http://www.pearsonsuccessnet.com/snpapp/iText/products/0-13-369833-5/Flash/Ch07/Econ_OnlineLectureNotes_ch7_s3.swf

23. Introduction: Characteristics of monopolistic competitions and oligopoly Monopolistic Oligopoly • Many firms in Market • Some variety of goods • Minimal barriers to entry • Little control over prices • Few firms in the market • Some Variety of Goods • Many Barriers to Entry • Some control over prices

24. Monopolistic Competition • Many companies compete in an open market to sell similar, but not identical, products • Examples • Specialty Shops (bagel, coffee, candy) • Gas Stations • Retail Stores • Jean Stores • Conditions • Many Firms: Low start-up costs allows large entry • Few Barriers: Easy for new firms • Little control over Price: Firms can’t raise prices much for fear of costumers going elsewhere • Differentiated Products • Allows a firm to profit from the differences b.t their product and competitor’s

25. NonPrice Competition • NonPrice competitions can be another way firms differentiate their products • Physical Characteristics • Size, color, shape, texture can all differentiate • Location • Convenience of location is huge! • Advertising, Image, or Status • Look around…. Why do some people buy one T-shirt over another? They both cover your bodies?

26. Prices • Prices, Output, and profits under monopolistic competition structures look similar to PC Market • Prices • Prices are higher than PC market but demand curve is more Elastic b/c customers can choose substitutes • Output • Elasticity in MC firms causes total output to fall between a monopoly and PC market • Profits • Can earn just enough to cover all of costs • Short term profits, but competition makes profit hard to maintain

27. Oligopoly • Market dominated by few, profitable firms • Barriers to Entry • Can be technological or created by system of govt. licenses or patents • Economies of scale can also lead to oligopoly • 3 Practices that concern Govt.from Oligopolies • Price Leadership: can lead to price wars • Collusion: Leads to price fixing and is illegal • Agreement among oligopoly leaders to set prices/output • Cartels: Organization of producers that agree to fix production/prices (OPEC) (See 178) • Also illegal in U.S. • Survive if every member sticks to plan

28. Lesson Closing • Virtual Economics Activity w/partner • Maintaining competition • Due Next Friday • Go in as Project Grade • Workbook pgs • 59, 145

29. Bell Work Get books/notes out Answer Main ideas 3-7 on small sheet of paper

30. Chapter 7.4 • “When does the govt. regulate competition?” • Objectives • How firms might try to increase their market • 3 market practices the govt. regulates or bans to protect competition • What is regulation, and its effects on some industries • Key Terms • http://www.pearsonsuccessnet.com/snpapp/iText/products/0-13-369833-5/Flash/Ch07/Econ_OnlineLectureNotes_ch7_s4.swf

31. Introduction • When does the govt. regulate competition? • Govt. sometimes takes steps to promote competition to promote lower prices • Done through…. • Anti-trust laws • Approving/not approving mergers • Deregulation

32. Increasing Market Power • Monopolies/Oligopolies are viewed as bad for consumers and economy • Firms try and merge with one another and drop prices in order to gain more market power and push others out

33. Govt. and Competition • Fed. Govt. has policies know as anti-trust laws • Meant to keep firms from gaining too much market power • FTC and DOJs Antitrust Division watch firms to make sure they only act fairly • History of Antitrust Policy • Despite laws, companies have used other strategies to gain market control

35. 3 Govt. Actions • Regulating Businesses • Govt. can regulate companies that try to get around antitrust laws • 1997, DOJ accuses Microsoft of using near-monopoly over the operating system market to try to take control of the browser market • Judge ruled against Microsoft. • MSFT could not force computer manufacturers to provide only MSFT software on new computers

36. 3 Govt. Actions Cont’d • Blocking Mergers • Govt. can block mergers to prevent rise of monopolies • Also checks in on past mergers to make sure they are not leading to monopolies • Govt. looks to predict effects of merger before approval • Corporate Mergers • Can benefit consumers too • Lower average prices which leads to: • Lower prices • More reliable products/services • More efficient industry

37. Deregulation • Govt. no longer decides what role each company can play in market and how much it can charge • Some regulation had been seen to reduce competition, leading to deregulation • Examples of Deregulation • Airlines • Trucking • Banking • Natural Gas • RR • Television Broadcasting

38. Judging Deregulation • How does it encourage competition? • Many new firms usually enter right away • Often weeds out weaker players in long-run • Example • When airlines deregulated, many new firms entered market, but some eventually failed • Competition increased among airlines and prices went down

39. Lesson Closing • How the Economy Works Video • Start on Essay • Complete All of Workbook for Ch. 7 • Study day Monday • Test Tuesday