Understanding Market Structures: Perfect Competition and Monopoly

1. Ch. 7 section 1Perfect Competition & Monopoly • MARKET STRUCTURES, Important features of a market, including the number of buyers and sellers, product uniformity across sellers, ease of entering the market, and forms of competition • PERFECT COMPETITION, A market structure with many fully informed buyers and sellers of an identical product and ease of entry. • COMMODITY, A product that is identical across sellers, such as bushel of wheat

2. Commodity • A buyer is not willing to pay more for one particular supplier’s product. • Buyers are concerned only with the price. • Perfect Competition • Buyers are fully informed about the price, quality, and availability of products, and sellers are fully informed about all resources and technology.

3. Perfect Competition • Firms can easily enter or leave the industry. No obstacles preventing new firms from entering profitable. • A perfectly competitive firm is so small relative to the size of the market that the firm’s choice about how much to produce has no effect on the market price.

4. continued • Ex. Microsoft, general electric • Foreign exchange, yen, euros, pounds • Agricultural products, livestock, corn, wheat • Many buyers & sellers that the actions of any one cannot influence the market price.

5. Market Price • Panel who decides the price of product. • Wheat $5 bushel of wheat. • Look at the graph • The demand curve facing an individual farmer is, a horizontal line drawn at the market price.

6. Monopoly • Monopoly, are sole supplier of a product with no close substitutes. Greek “one seller”. • A monopolist has more market power than does a business in any other market structure.

7. Market power • Is the ability of a firm to raise its price w/o losing all sales to rivals. • A perfect competitor has no market power. • It has high barriers to entry, restrictions on the entry of new firms into an industry. • Allows to charge a price above the competitive price.

8. Legal Restrictions • Prevent new firms from entering a market is to make entry illegal. • Patents, licenses, and other legal restrictions imposed by the government provide some producers w/ legal protection against competition. • Govn’t confer monopoly rights to sell hot dogs at civic auditoriums, collect garbage, offer bus & taxi service, & supply other services ranging electricity to cable t.v. .

9. Ex. Legal restrictions • Many states are monopolies sellers of liquor and lottery tickets. • The U.S. Postal Service (USPS) exclusive right to deliver first-class mail.

10. Economies of scale • A monopoly sometimes emerges naturally when a firms experiences substantial economies of scale, as reflected by the downward-sloping , long-run average cost curve. • Single firm satisfy market demand at a lower average cost per unit than could two or more smaller firms. • Market demand is not great enough to allow more than one firm to achieve sufficient economies of scale.

11. continued • A monopoly that emerges from the nature of costs is called a natural monopoly. • New entrant cannot sell enough output to experience the economies of scale enjoyed by an established natural monopolist. Entry into the market is naturally blocked . • Less populated areas, natural monopolies include the only grocery store, movie theater, restaurant for miles around. (geographic monopolies).

12. Control of Essential Resources • Control of critical resources • Decades Alcoa controlled bauxite, aluminum. • China is a monopoly supplier of panda to the world zoo’s. • Since 1930s, world’s diamond trade De Beer.

13. Monopolists may not earn a profit • The demand curve for a monopolist’s output also is the market demand curve. • True monopolies are rare b/c a profitable monopoly attracts competitors & substitutes. • Technological changes may allow for new entries into new monopolies.

14. Monopoly and Efficiency • Monopoly Versus Perfect Competition • Competition forces firms to be efficient- that is , to produce the maximum possible output form available resources- and to supply the product at the lowest possible price. • Consumers get a substantial consumer surplus from this low price. Monopolists would charge more than competitive firms, fewer consumers will be able to afford to buy the product.

15. Other problems w/ Monopoly • Resources wasted securing monopoly privilege. • Influence political system, which thy use to protect and strengthen their monopoly power. • Lawyer’s fee, lobbying expenses, gathering special privileges from govn’t are largely a social waste. Scarce resources are not added to output of unit. • Monopolies may grow inefficient,lazy, fat, not innovative in production techniques, reluctant to make new products.

16. Continued • Economies of scale-a monopolist might be able to produce output at a lower average cost than could competitive firms. Price, or the cost of production could be lower w/ monopoly than w/ perfect competition. • Government regulation-intervention increase social welfare • Keeping Prices low to avoid regulation • Keeping Prices low to avoid competiton