Economics

1. Economics Chapter 6

2. Chapter 6 Section 1

3. Objectives • What is perfect (pure) competition? • What is monopolistic competition? • How do sellers differentiate their products under monopolistic competition?

4. Highly Competitive Markets • What is a highly competitive market? • Market that has a wide range of products with lower prices. • Products are offered by a lot of sellers. • Example-market for jeans.

5. Types of Highly Competitive Markets • Two types of highly competitive markets: • Perfect competition-Ideal market structure in which consumers and producers compete under the laws of supply and demand. • Four characteristics of perfect competition: • Many buyers and sellers act independently. • Sellers offer identical products. • Buyers are well informed about products. • Sellers can enter or exit the market easily.

6. Types of Highly Competitive Markets 2. Monopolistic Competition-Seller offers different rather than identical products. ﭺThree characteristics of monopolistic competition: • Product differentiation-point to differences. • Nonprice Competition-Compare products in ways other than price. Concentrate on advertising brand name. • Profit-by concentrating on product differentiation and nonprice competition, sellers can set prices above competitive rates to increase profits.

7. Chapter 6 Section 2

8. Objectives • How is an oligopoly structured? • What is a monopoly? • What type of monopolies exist? • What factors affect price in oligopolies and monopolies?

9. Imperfectly Competitive Markets • We talked about perfectly competitive markets last time, but not all markets are this way. • Therefore, we have imperfectly competitive markets or not competitive. • There are two types of imperfectly competitive markets: • Oligopoly • Monopoly

10. Oligopoly • Oligopoly-Market in which a few large sellers control the market. • Three characteristics: • Few large sellers • Identical or similar products. • Sellers cannot enter the market easily due to start-up costs and consumer loyalty.

11. Oligopoly • Four ways oligopolies determine prices: • Nonprice competition-advertising and brand loyalty. • Interdependent pricing-the setting of prices in a manner responsive to one’s competitors. Can lead to a price war. • Collusion-when sellers secretly agree to set production levels-illegal in the U.S. • Cartel-same as collusion, but not secret.

12. Monopoly • Monopolies-Market in which one seller controls the market. • Three characteristics of a monopoly: • Single seller • No close substitute available. • Other sellers cannot enter the market easily.

13. Monopoly • Four types of Monopolies: • Natural monopoly-market in which competition is inconvenient and impractical. SCE&G, no sense in having two power companies in Williston. • Geographic monopoly-a market whose geographic area is so limited that single seller can provide services and set prices. • Technological monopoly-market that is dominated by a single producer because of new technology. Government gives patents to protect producer. • Government monopoly-any market in which the government is the sole producer. Town water.

14. Monopoly Three reasons that prevent monopolies from raising prices to high: • Consumer demand • Potential competition-high profits leads others to enter the market. • Government regulation.

15. Chapter 6 Section 3

16. Objectives • What was the relationship between the U.S. government and business before the 1880’s? • What was the purpose of early antitrust legislation? • How has the government enforced antitrust legislation?

17. Era of Big Business • After the Civil War, fierce competition swept through the U.S. • Many small companies went out of business or were bought by larger companies. • This time period became an era of big business dominated by monopolies called trusts.

18. Era of Big Business • Trust- A group of companies that combine to eliminate competition in an industry and thereby gain a monopoly. • At first the government did not do anything about this because it had a economic policy of laissez-faire (let them be) or a hands off economic policy. • Of course this was not a good thing, and many people became concerned about the trusts.

19. Era of Big Business • The government finally stepped in and passed several pieces of antitrust legislation. • Antitrust legislation- Acts designed to monitor and regulate big business, prevent monopolies from forming, and break up existing monopolies.

20. Antitrust Legislation • Interstate Commerce Act- Created the Interstate Commerce Commission (ICC). • Oversaw the railroad freight business. • Rates for transporting goods had risen too high. This legislation tried to keep prices down. • Legislation was abolished in 1995

21. Antitrust Legislation • Sherman Antitrust Act- Banned any agreements and actions “in restraint of trade”. • Language of the Act was very vague and many trusts were able to get around it. • Most famous monopoly to be broken up was the Standard Oil Company. • The Standard Oil Company controlled almost all of the oil industry in the U.S. • One branch of this company still exists today, Exxon.

22. Antitrust Legislation • Clayton Antitrust Act- Strengthened the Sherman Antitrust Act. • One main thing it did was outlawed price discrimination. • Price discrimination: Practice of offering different prices to different customers under the same circumstances. • This meant that big companies were trying to get suppliers to give them discounts because they buy such large quantities of supplies.

23. Antitrust Legislation • Federal Trade Commission Act- Created the Federal Trade Commission (FTC). • The FTC investigates charges of unfair methods of competition and commerce. • It could order a company to change its methods of doing business.