Chapter 7 Market Structures

Chapter 7 Market Structures Rancell Brito, Gabriela Ruiz, Nicole Delcampillo, Eddy Saczek Period 5, March 24, 2011

Section 1 Perfect Competition Four conditions for perfect competition • First many buyers and sellers have to participate in the market. • Second sellers offer identical products. • Then, buyers and sellers are well informed about the product. • Lastly, sellers are able to enter and exit the market freely.

The simplest market structure is perfect competition • This market is the one with a large number of firms all producing essentially the same product. • It is full of firms but they produce so little of the product so there is not only one firm that can influence the prices.

Many buyers and sellers participate in the market. • This means that no one can buy and sell enough goods to influence greatly the total market economy quantity. • The market determines price with out any influence from individual suppliers or consumers. http://www.movebr.com/images/handing-keys-small.png

Identical products • This means that there are no differences between products sold by different suppliers. • A commodity is a product that is considered the same no matter who makes or sell it. http://farm3.static.flickr.com/2509/3726852202_8142a676d8.jpg

Informed buyers and sellers • The buyers and sellers know enough about the market to find the best deal that they can get. http://anurealty.com/wp2/wp-content/uploads/2010/12/buyers-sellers20street0sign.jpg

For this you need to be able to enter when you can make money and leave when you are losing profit. Decision making skills. Free market Entry and Exit. http://images.wikia.com/wikiality/images/6/61/Free_Marketmechanism.jpg

Barrier to entry • These are factors that make it difficult for new firms to enter a market. http://interacc.typepad.com/.a/6a01053596fb28970c012876cc23d9970c-300wi

In this the common barriers to entry include start-up cost and technology. Imperfect competition http://ctaar.rutgers.edu/gag/GRAPHS/moncmp1.gif

Start-up Cost • These are the expenses that a new business pay before the first product reaches the costumer. http://www.bartenderconfessions.com/wp-content/uploads/2008/07/banner7.jpg

When a school group needs to raise money, its members can sell goods like flowers, cookies, or candy. But many students would not sell the new world-processing program because they would have no idea how to make profit. Technology http://studentlife.unlv.edu/technology/images/technology.jpg

Price and Output • Perfectly competitive markets are the most efficient. • In a perfectly competitive market price correctly represent the opportunity cost of each product. • To sum-up in the long run, output will reach the point where each supplying firm just covers over all its cost, including paying the firms and whereas enough to make the business worth while. http://www.xhtml-css-code.com/wp-content/uploads/2009/07/right_price.jpg

Describing Monopoly Section 2 Monopoly A Monopoly is a market dominated by a single seller. • Normal competitive market has a lot of buyers and sellers • Monopoly market there is only one seller. • a lot of requirements define a monopoly, even if it looks and acts like a monopoly, it might not be one. • There are ways around a monopoly.

Forming a Monopoly Economies of Scale • Economies of scale: factors that cause a producer’s average cost per unit to fall as output rises. • The more you produce the less it costs. • If it costs $1,000 to build a factory, and each unit of output costs $10 then to make one unit it will cost $1,010. If you will produce 2 units then it will cost $1,020, that means that one unit would cost $510 • If the industry has limited economies of scale the output will rise to a level when the limited scale are exhausted and the cost will go up • Factories that have a good economies of scale then the industry costs will never go up.

Forming a Monopoly Natural Monopolies • Natural monopolya market that runs most efficiently when one firm provides all of the output. • If another firm enters the market, both firms will have to compete to sell more; neither of them will earn as much as they need and they will both have to close. • A good example of a natural monopoly is a water company. • To have more than one water company in a competitive market, both companies would have to dig reservoirs and set up overlapping networks of pipes and pumping stations to deliver water to the same town. This would cause each company to pump unneeded water threw the pipes to compete and they would have to pay for more pipes.

Government Monopolies A government monopoly is a monopoly created by the government. • The government gives a company monopoly power by issuing a patent • A patent gives a company exclusive rights to sell a new good or service for a specific period of time. • If someone invents something, and proves to the government that they invented it, the government should give them a patent and then they are the only people aloud to sell that. • The government wants to give companies the power to have a monopoly so that they can profit from there research Technological Monopolies

Government Monopolies Franchises and Licenses • For example, a national park would only allow on firm to sell food inside the park. • On a larger scale, the government would issue a license • A license is a government issued right to operate a business. A franchise is a contract issued by a local authority that gives a single firm the right to sell its goods within a exclusive market.

Government Monopolies Industrial Organizations • The government allows the companies to restrict the number of firms in a market. • For example, in the United States Major League sports restrict the number and location of there teams.

Output Decisions • A monopolist always looks at the bigger picture on things. • If you want something you will pay anything. • Monopolist will make fewer goods at a higher price.

The Monopolist’s Dilemma • It all depends on the person if you need it you will pay whatever the price is. • The law of demand is when a monopolist increase a price, and it will sell less when its cheaper it will sell more • If you produce more, the price falls, it produces less and the price will rise

Falling Marginal Revenue • A sell should set revenue, so that it’s whatever it earned the last time it can equal the marginal cost or extra. • The difference between perfectly competitive market and marginal revenue each firm will receives the same price no matter how much it produces • Breather Deep is shown as if you set a higher price it wont sell as if it was lower you will sell more and get more profit • Marginal revenue is mostly equal to price • A firm when it has control over a price and if they can out a price to sell more the marginal revenue will be less than the price • A market the price will stay the same

Setting a Price • Now marginal revenue is equal to marginal cost • Market demand curve for Breath Deep shown in purple • Marginal revenue curve shown in blue. • Monopolist marginal revenue is lower than the market price • Price and outputs will be different if and market is perfectly competitive. • In a perfect competitive market marginal revenue will always be equal to market price • Breathe Deep will always have more units sold and a lower market price than a monopoly.

Profits How much will a monopolist earn? • The cost of producing 9,000 doses is $3 per dose. Each dose will be sold at $11. The monopolist at the end will earn $8 of profit per dose.

PRICE DISCRIMINATION Price Discrimination- Divisions of customers or groups based on how much they will pay for goods. Market Power- The ability of companies to change prices and output like a monopolist. • Market Power and Price Discrimination can be found in any market except for a perfect competition. Monopolist will be able to divide the consumers into groups and charge different prices to each. Monopolist will set a lower price & will gain more consumers.

TARGET DISCOUNTS Companies tend to divide consumers into groups and create price polices for each. Companies look for consumers in need of goods that are willing to pay. Discounted airline fare: travelers who buy their tickets weeks in advanced. Manufactures’ rebate offers: certain manufactures like cars & televisions will make a small refund to the buyers who fill out a form and mail it back to them. Senior citizen or student discounts: In some places they allow students or senior citizens a discount because they know they are not able to pay full price. Like movies, zoo Children fly or stay free promotion: Families with children tend to spend money on expenses rather than on vacations so there are offers with family with children discounts

Limits of Prices Discrimination • Some market power: firms must have some control over prices. • Distinct customer groups: Price-discriminating firms must be able to divide customers into distinct based on pricing. • Difficult resale: If one customer buys a product at a low price and goes back and sells it at a higher price to make profit it will not be considered Price Discrimination.

Section 3 Monopolistic Competition and oligopoly Monopolistic competition • In a monopolistic competition, companies compete by selling products that are similar but not identical. • This competition is possible because products being sold by individual firms are similar enough to be substituted by one another. • An example of monopolistic competition is leather jackets. Each jacket is made of leather but you can choose from different styles etc.. • Other examples are ice cream shops, gas stations , and retail stores

Four conditions of monopolistic competition • Many firms • Few artificial barriers to entry • Slight control over price • Differentiated products.

Many firms • Monopolistically competitive markets are not determined by high start up costs. So companies can start earning money after small initial investments. • This allows for many firms to begin competing

Few artificial barriers to entry • When firms enter monopolistically competitive markets they do not face high barriers. • Patents do not stop anyone from competing • Also there are so many companies that producers cannot work together to keep out new competitors

Slight control over price • Firms have little control over price in monopolistic competitive markets. • This is because consumers can easily substitute a product for another similar one. For example a buyer will probably choose a generic brand of cola over coca-cola if they can get a better deal on it.

Differentiated products • Differentiation allows a monopolistically competitive seller to profit from the differences of his or her competitors products

Non price Competition Firms compete not only based on price. They compete on several different forms. • Physical characteristics. The simplest way for a firm to distinguish its product is by size, shape, color, texture, and taste. For example a pen is always a writing utensil that requires ink but a customer pay extra for a pen that looks or writes differently. • Location. Products can be differentiated by where they are sold. This can either make them fail or thrive. Like a convenience store located in the desert probably wont be as successful than a store centralized around the population. • Service level. Sellers can charge higher prices due to the level of service. A conventional restaurant and a fast food restaurant may charge different prices for the same meal due to the service. • advertising imaging or status. Firms create apparent differences to theier own products to raise prices. A designer might put the name of the brand on a normal t-shirt and sell it at a higher cost than the same t-shirt without the brand name on it.

Price output and profits When economist look price out put and profits and compare it perfect competition, they realize they are very similar. • Prices • Prices in a monopolistic economy are usually higher. But the amount of competing companies prevents prices of products from skyrocketing. • Output • Output and price are negatively related. As one goes up the other one goes down. • Profit • Monopolistically competitive firms earn just enough to cover their costs. Even though companies can earn profits, companies need to work hard to keep their products at the top.

Oligopoly Barriers to entry • An oligopoly can create barriers to keep other companies from entering. Cooperation and collusion • Oligopolistic firms seem to work together to forms monopolies. But governments have regulations against this. Sometimes market leaders can cut or raise prices by making it clear to other firms. Cartels • A cartel is a formal agreements by producers to coordinate prices and production. Cartels are illegal in the united states. If not prices will rise and firms will lose profits.

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Chapter 7 Market Structures