PERFECT COMPETITION

1. PERFECT COMPETITION 7.1

2. Objectives • Describe the four conditions that are in place in a perfectly competitive market. • List two common barriers that prevent firms from entering a market. • Describe prices and output in a perfectly competitive market.

3. Perfect Competition- a market structure in which a large number of firms all produce the same product. • Four Conditions for Perfect Competition • Many Buyers and Sellers

4. B. Identical Products- there are no differences between the products sold by different suppliers • Commodity- a product that is the same no matter who produces it, such as petroleum, notebook paper, or milk

5. C. Informed Buyers and Sellers- know enough about the market to find the best deal

6. D. Free Market Entry and Exit • Firms must be able to enter markets when they will make money and exit them when they will lose money

7. II. Barriers to Entry Imperfect Competition- a market structure that does not meet the conditions of perfect competition • Start-Up Costs- the expenses a firm must pay before it can begin to produce and sell goods B. Technology • Some markets require a high degree of technological know how

8. III. Price and Output • Efficiency is the primary characteristic of perfect competition • Prices correctly represent the opportunity cost of the product • Prices are the lowest sustainable price possible

9. MONOPOLY

10. Objectives • Describe characteristics and give examples of monopoly. • Describe how monopolies are formed, including government monopolies. • Explain how a firm with a monopoly sets output and price, and why companies practice price discrimination.

11. Monopoly- a market dominated by a single seller II. Forming a Monopoly • Economies of Scale- factors that cause a producer’s average cost per unit to fall as output rises

12. Limited economies of scale- output will eventually rise as production rises ii. An industry that enjoys economies of scale can easily become a natural monopoly

13. B. Natural Monopolies- a market that runs most efficiently when one large firm supplies all of the output • Utilities

14. C. Technology and Change • Technology can cut fixed costs and make small companies as efficient as one large firm

15. III. Government Monopolies • Patents- license that gives the inventor of a new product the exclusive right to sell it for a certain period of time

16. B. Franchises and Licenses • Franchise- the right to sell a good or service within an exclusive market • License- a govt issued right to operate a business

17. C. Industrial Organizations • The govt allows MLB and other sports organizations to restrict entry of teams

18. IV. Output Decisions • The Monopoly’s Dilemma i. Monopoly still limited by the demand curve for the product

19. B.Falling Marginal Revenue i. Marginal revenue is lower than the price when the firm can control the price and cut it to sell more

20. V. Price Discrimination A.Market power- the ability of a company to change prices and output like a monopolist

21. C. Targeted Discounts- Companies divide consumers into large groups and design pricing policies for each group • Rebates • Senior citizen and students • Free for children

22. D. Limits of Price Discrimination • Some market power • Distinct customer groups • Difficult resale

23. Monopolistic Competition

24. Objectives • Describe characteristics and give examples of monopolistic competition. • Explain how firms compete without lowering prices. • Understand how firms in a monopolistically competitive market set output. • Describe characteristics and give examples of oligopoly.

25. Monopolistic Competition • a market structure in which many companies sell products that are similar but not identical. • Examples: gas station, retail store

26. II. Four Conditions of Monopolistic Competition • Many Firms- w/ a small investment, firms can begin to sell a product • Few artificial Barriers to entry • Slight Control over price • Differentiated Products • differentiation

27. III. Nonprice Competition- A way to attract customers through style, service, or location, but not a lower price A. Physical Characteristics

28. B. Location- some goods can be differentiated by where they are sold C. Service Level- higher prices can be charged if a firm offers a high level of service

29. D. Advertising, image, or status i. Advertising creates more of a perceived difference rather than a real one

30. IV. Price, Output, and Profits • Prices and output will be higher than in perfectly comp. markets but lower than monopolies • Profit is kept down by competition w/ other firms and the ease of entry into the market

31. V. Oligopoly- a market structure in which a few large firms dominate the market • Barriers to Entry

32. B. Cooperation and Collusion • Price Leadership- w/o actually ‘cooperating’ to raise prices, firms will make it well known that they are going to raise prices and hope that others do as well • Collusion- an agreement among firms to divide the market, set prices, or limit production 1. Price fixing- agreement to charge one price for the same good

33. C. Cartels- a formal organization of producers that agree to coordinate prices and production