UNIT 3

1. UNIT 3 INTRODUCTION TO MICROECONOMICS

2. CHAPTER 8 MARKET STRUCUTRES

4. 8.1 PERFECT COMPETITION

5. Introduction • What are the characteristics of perfect competition? • Many buyers and sellers • Identical products • Informed buyers and sellers • Free market entry and exit • perfect competition: a market structure in which a large number of firms all produce the same product and no single seller controls supply or prices

6. Perfect Competition • The simplest market structure is perfect competition, also called pure competition. • A perfectly competitive market: • Has a large number of firms • Has firms that produce the same product • Assumes the market is in equilibrium • Assumes that firms sell the same product at the same price

7. Conditions, cont. • Many buyers and sellers • Perfectly competitive markets must have many buyers and sellers. • No one person or firm can be so powerful as to influence the total market quantity or market price. • Because of this, sellers are price takers. • A price taker is a seller that can sell all of its output at the equilibrium price but can sell none of its output at any other price

8. Conditions, cont. • Identical Products • There is no difference in the products sold in a perfectly competitive market. • These commodities include things like low-grade gasoline, notebook paper, and sugar. • A commodity is : a product that is considered the same no matter who produces or sells it

9. Conditions, cont. • Informed buyers and sellers • Under conditions of perfect competition, the market provides the buyer with full information about the product features and its price. • Both buyers and sellers have full disclosure about the product. • Free market entry and exit • It is very easy for sellers to enter and exit in a perfectly competitive market. • Usually they enter when a product is very popular and exit when the demand for that product decreases.

10. Barriers to Entry • Which barrier to entry can be overcome by education or vocational training? • Imperfect competition can come about through barriers to entry. • Common barriers include: • Start-up costs: When start-up costs are high it is more difficult for new firms to enter the market. Therefore, markets with high start-up costs are less likely to be perfectly competitive. • Technology: Markets that require a high degree of technical knowledge can be difficult to enter into without preparation and study.

11. Barriers to Entry, cont. • Landscaping presents no technical challenges and start-up costs are low. However, an auto repair shop requires advanced technical skills and the equipment needed to run the shop makes start-up costs another significant barrier to entry.

12. What is Perfect Competition?

13. Profit Is A Signal in a Perfectly Competitive Market • When profits exist • New firms enter the market • Supply rises • Prices fall • Prices fall until firms no longer see an incentive to enter the market • When profits don’t exist • Firms leave the market • Supply falls • Prices rise • Prices rise until new firms see an incentive to enter the market

14. 8.1 Review Questions • What are the characteristics of a perfectly competitive market? • What are some examples of perfectly competitive markets? • What does it mean to say that a firm “has no control over prices”? • What role does profit play in a perfectly competitive market?

15. 8.2 Monopoly

16. How Monopoly’s differ from Perfect Competition • They key difference is that monopoly’s are price makers • Price makers-a seller that can sell some of its output at various prices • That is, monopoly’s can set the price for the products that they sell • This does not mean that they will always set the highest price possible

17. Introduction • What are the characteristics of a monopoly? • A single seller • Many barriers to entry for new firms • No variety of goods • Complete control over price

18. Describing Monopoly • Since they have the market cornered for a particular good or service, monopolies can charge high prices and the quantity of goods is lower than it would be in a competitive market. • monopoly: a market in which a single seller dominates

19. Economies of Scale • Different market conditions can create different types of economies. • Some monopolies enjoy what is known as economies of scale - characteristics that cause a producer’s average cost to drop as production rises. • Why do production costs fall as output increases in an economy of scale?

20. Natural Monopolies • Another type of monopoly is a natural monopoly. • natural monopoly: a market that runs most efficiently when one large firm supplies all of the output • Public water is an example of a natural monopoly. • If water were a part of the competitive market, different companies would spend large sums of money to dig reservoirs - more land and water would be used than necessary. It would be very inefficient.

21. Natural Monopolies, cont. • Technology can sometimes destroy a natural monopoly. • A new innovation can cut fixed costs and make small companies as efficient as one large firm.

22. Government Monopolies • What government actions can lead to the creation of monopolies? • government monopoly: a monopoly created by the government • Issuing a patent - gives a company exclusive rights to sell a new good or service for a particular period of time. • Granting a franchise - gives a single firm the right to sell its goods within an exclusive market • Example: In some areas only one cable company is allowed to service an area • Issuing a license - allows firms to operate a business, especially where scarce resources are involved • Example: a radio station is issued a license to play their content on a particular frequency • Restricting the number of firms in a market

23. The Monopolist’s Dilemma • Monopolists look at the big picture and try to maximize profits, which usually means they produce fewer goods at higher prices. • The monopolist’s dilemma can be viewed in terms of demand. • The law of demand states that buyers will demand more of a good at lower prices. • BUT the more a monopolist produces, the less they will receive in profits.

24. Price Discrimination • In many cases, the monopolist charges the same price to all customers. • price discrimination: the division of consumers into groups based on how much they will pay for a good • But in some instances, the monopolist may be able to charge different prices to different groups. This is known as price discrimination. • Price discrimination is based on the idea that each customer has a maximum price that he or she will pay for a good.

25. Targeted Discounts • There are many targeted discounts available to particular groups, including: • Discounted airline fares • Manufacturers’ rebate offer • Senior citizen and student discounts • Children fly or stay free promotions

26. Limits of Price Discrimination • What three conditions must a market meet in order for price discrimination to work? • Firms must have some market power • Customers must be divided into distinct groups • Buyers must not be in a position in which they can easily resell the good or service • Most forms of price discrimination are legal, but some firms use price discrimination to drive other firms out of business, which is illegal.

27. Anti-Trust Laws • The U.S. government tries to meet its objectives to control monopoly power and to promote competition through anti-trust laws.

28. Introduction • When does the government regulate competition? • Sometimes the government takes steps to promote competition because markets with more competition have lower prices. • The government does this through: • Antitrust laws • Approving or not approving mergers • Deregulation

29. Market Power • Monopolies and oligopolies are viewed by many as being bad for the consumer and the economy. • Public outrage with powerful trusts in the late 1800s led Congress to pass antitrust regulation.

30. Government and Competition • The federal government has policies, known as antitrust laws, to keep firms from gaining too much market power. • The Federal Trade Commission and the Department of Justice’s Antitrust Division watch firms to make sure they don’t unfairly force out competitors.

31. Blocking Mergers • The government has the power to prevent the rise of monopolies by blocking mergers. • The government also checks in on past mergers to make sure that they do not lead to unfair market control. • The government tries to predict the effects of a merger before approving it.

32. Corporate Mergers • Some mergers can benefit consumers. • Corporate mergers will lower average prices, which leads to: • Lower prices • More reliable products and services • More efficient industry

33. 8.2 Review Questions • What are the characteristics of a monopoly? • What are some examples of barriers to entry? • Do monopolists ever face competition? Explain. • What purpose do anti-trust laws serve? • Give an example of price-discrimination.

34. 8.3 Monopolistic Competition

35. Key Terms, cont. • price war: a series of competitive price cuts that lowers the market price below the cost of production • collusion: an illegal agreement among firms to divide the market, set prices, or limit production • price fixing: an agreement among firms to charge one price for the same good • cartel: a formal organization of producers that agree to coordinate prices and production

36. Monopolistic Competition • In monopolistic competition, many companies compete in an open market to sell similar, but not identical, products. • monopolistic competition: a market structure in which many companies sell products that are similar but not identical • Common examples or monopolistically competitive firms are: • Bagel shops • Gas stations • Retail stores The market for jeans is monopolistically competitive because jeans can vary by size, color, style, and designer.

37. Monopolistic Competition Conditions • Many Firms • Low start-up costs allow many firms to enter the market. • Few barriers to entry • It is easy for new firms to enter the market. • Little control over price • If a firm raises their prices too high, consumers will go elsewhere to buy the product. • Differentiated products • Allows a firm to profit from the differences between their product and a competitor’s product.

38. Monopolistic Competition Number of firms: Many Variety of goods: Some Barriers to entry: Low Control over prices: Little ENTRY Little Control

39. Location Nonprice Competition Physical Characteristics The simplest way for a firm to distinguish its products is to offer a new size, color, shape, texture or taste. Examples: running shoes, pens, cars, and toothpaste Some goods can be differentiated by where they are sold. Gas stations, movie theaters, and grocery stores succeed or fail based on their locations

40. Advertising, image, or status Nonprice Competition Service Level Some sellers can charge higher prices because they offer their customers a high level of service Examples: Fast food restaurants vs. conventional restaurants Conventional restaurants – paying for atmosphere Firms use advertising to create apparent differences between their own offerings and other products in the marketplace. The product differences are often more a matter of perception than reality. Example: A designer can apply their logo to a plain white t-shirt and charge more

41. Wannabe a Monopoly • Many monopolistic competitors would rather be a monopoly • As a result they try to make their product as unique as they can to convince consumers that there IS a difference between their product and the competition • The main way they do this is through advertising • What matters is how much competition a seller faces • The more competition-the more they are like perfect competition • The less competition-the more they are like a monopoly

42. 8.3 Review Questions • What are the characteristics of monopolistic competition? • What are some examples of monopolistic competition? • Are monopolistic competitors price takers or price makers? Explain. • How do monopolistic competitors answer questions about how much to produce and what price to charge? • Name a product in this market category that is more monopoly and less perfect completion. • Name a product in this market category that is more perfect completion and less monopoly.

43. 8.4 Oligopoly

44. Oligopoly Oligopoly describes a market dominated by a few large, profitable firms. Oligopoly looks like an imperfect form of monopoly. Economists usually call an industry an oligopoly if the four largest firms produce at least 70 to 80 percent of the output. Examples: air travel, breakfast cereals, and household appliances

45. Barriers to Entry - Oligopoly • An oligopoly can form when significant barriers to entry keep new companies from entering the market to compete with existing firms • These barriers can be created by a system of government licenses or patents. • Other barriers can be: high start-up costs or large advertising campaigns • small airlines vs. large airlines • Some oligopolies occur because of economies of scale

46. Cooperation and Collusion • Government regulations try to make oligopolistic firms act more like competitive firms • When determined oligopolists work together illegally to set prices and bar competing firms from the market, they can become as damaging to the consumer as a monopoly.

47. Oligopoly Number of firms: A few Variety of goods: Some Barriers to entry: High Control over prices: Some Some Control Entry

48. Cooperation and Collusion • The three practices that concern government the most are: • Predatory pricing • :selling a product below cost for a short period of time to drive competitors out of the market • collusion • agreement among members of an oligopoly to set prices and production levels • One out come of collusion is called price fixing • an agreement among firms to sell at the same or very similar prices • cartels • Stronger than a collusive agreement • agreement by a formal organization of producers to coordinate prices and production

49. 8.4 Review Questions • What are the characteristics of an oligopoly? • What are some examples of oligopolistic markets? • Are sellers in an oligopolistic markets price takers or price makers? Explain. • Why do we need to be concerned with oligopolys?

50. CHAPTER 9 LABOR, EMPLOYMENT, AND WAGES