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Perfect Competition

Perfect Competition. Total Supply & Total Demand interact  Equilibrium Price (Q.D. = Q.S.) Rarely seen in real world. 5 Conditions of Perfect Competition. Large Market (lots of buyers and sellers) Similar Product Easy Entry and Exit -Sellers can’t prevent competition (entry to market)

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Perfect Competition

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  1. Perfect Competition • Total Supply & Total Demand interact  Equilibrium Price (Q.D. = Q.S.) • Rarely seen in real world

  2. 5 Conditions of Perfect Competition • Large Market (lots of buyers and sellers) • Similar Product • Easy Entry and Exit -Sellers can’t prevent competition (entry to market) • Easily Obtainable Info -Info on P, Q, S easy to find • No control over Price -S & D control market, NOT single buyer or seller

  3. Real Life Example: Agriculture • Farmers accept market Price • Can’t sell more expensive: no one will buy • Won’t sell cheaper: lose $$$ • Crop similar (corn is corn…) • Costs low to buy/rent farmland compared to starting a corporation. Farming methods can be learned • Info. easy to find • 1 farmer has no control of price

  4. Wanted: Perfect Competition • Competition price so only covers cost of production and normal profit = GREAT FOR CONSUMERS!!

  5. Imperfect Competition • Individual or group buys/sells product in large enough amounts that price is affected • Monopolies, Oligopolies and Monopolistic Competition = Imperfectly Competitive

  6. Pure Monopoly • Most extreme form of imperfect competition • Single seller controls Supply of product and so determines Price • Some electric companies • Postal Service first class mail delivery

  7. 4 Characteristics of Pure Monopoly: • Single Seller • No substitutes • No entry -barriers to prevent others from entering market • Almost complete control of price -control price by controlling supply -however, can’t charge outrageous price because law of demand (P up, D down)

  8. Types of Monopolies • Natural- • Produce products for lowest cost, force competitors out of business • Need large investment • More efficient to have one business *EG: Electric Company

  9. Types of Monopolies 2.Geographic- • Best location • But many losing importance *EG: small-town auto repair shop OR Wal-Mart

  10. Types of Monopolies 3.Technological- • Seller has patent • Gives right to exclusively manufacture an invention for a specific # of years *EG: Polaroid film OR any invention!

  11. Types of Monopolies 4. Government- • Created by legal barriers to entry • EG: Tennessee Valley Authority (TVA) • federally owned corporation in U.S. created in May 1933 to provide navigation, flood control, electricity generation, fertilizer manufacturing, and economic development in the Tennessee Valley (region greatly impacted by Great Depression)

  12. Cartel • International monopoly • Arrangement among groups of industrial business, usually in different countries, to reduce international competition by controlling price, production, and distribution of goods • EG: OPEC -1960

  13. Oligopoly • A few suppliers dominate, have some control of price • Examples? • Airline industry • Cigarette industry • Domestic car industry

  14. 5 Characteristics of Oligopolies: THINK AIRLINE INDUSTRY… • A few sellers dominate • Barriers to entry • Identical or slightly different products • Nonprice competition • Limited control over price (eg: price wars)

  15. Nonprice Competition • Style • Color • Convenience

  16. Oligopolies • Are they harmful? • -Compared to perfectly competitive industry, NO! • -Stable prices, wider variety of products

  17. Monopolistic Competition • Large # sellers offer similar but slightly different products • Very common in many U.S. industries • Competitive Advertising

  18. 5 Characteristics of Monopolistic Competition: THINK TOOTHPASTE INDUSTRY • Numerous sellers • Relatively easy entry • Differentiated products • Nonprice competition • Some control over price -due to customer loyalty and product differences

  19. Comparison (p. 232) Perfect Competition Very many sellers Monopolistic Competition Many sellers Oligopoly Few sellers Monopoly 1 seller Least CompetitiveMost Competitive

  20. Homework • Write 2 paragraphs. Explain which market structure (perfect competition, pure monopoly, oligopoly, or monopolistic competition) is best for: A. The consumer B. The producer Due tomorrow.

  21. Homework • Read Chapter 10, Section 3 (p. 244-247) for tomorrow!!!

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