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Economics

Economics. Unit 3 Chapter 7. A market structure is the arrangement that allows buyers and sellers to exchange things ( Market ). There are 4 Types of Market Structures. Perfect Competition Monopoly Oligopoly Monopolistic Competition.

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Economics

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  1. Economics Unit 3 Chapter 7

  2. A market structure is the arrangement that allows buyers and sellers to exchange things (Market)

  3. There are 4 Types of Market Structures Perfect Competition Monopoly Oligopoly Monopolistic Competition

  4. …If it’s not perfect competition, then it’s imperfect competition.

  5. Perfect Competition is: A market structure in which a large number of firms all produce the same product.

  6. Perfect Competition : 4 Conditions for Perfect Competition: • Many buyers and sellers in the market: • By having many participants, no individual or company can be powerful enough to influence the total market quantity or price. • The market price must be accepted as given. • So, the market determines the price!

  7. Perfect Competition : 4 Conditions for Perfect Competition: • Identical products: • There are no difference between the products sold by different suppliers. (Commodity)

  8. Perfect Competition : 4 Conditions for Perfect Competition: • Informed buyers and sellers: • Buyers and sellers need to know enough about the market to get the best deal.

  9. Perfect Competition : 4 Conditions for Perfect Competition: • Free Market Entry and Exit: • Firms must be able to enter the market when they can make money and leave them when they can’t.

  10. Barriers to Entry Factors that make it difficult for new firms to enter the market. Lead to Imperfect Competition! Barriers to Entry: Start up costs: The expenses a firm must pay before it can begin to produce and sell goods. Technology: When markets require a high degree of technological know-how.

  11. Price and Output • Perfectly competitive markets are efficient. • Competition keeps prices and production costs low. • Prices correctly represent opportunity costs. • In the long run, output will reach a point where it barely covers the costs to run the business.

  12. Imperfect Competition • Monopoly • Oligopoly • Monopolistic Competition

  13. Imperfect Competition • Monopoly A market dominated by a single seller.

  14. Conditions that lead to a Monopoly: Economies of Scale -High Start up costs -Cost falls the more you make

  15. Conditions that lead to a Monopoly: Natural Monopoly Markets with room for only 1 company: Ex: Public Water

  16. Conditions that lead to a Monopoly: Government Monopolies-where govt. actions create barriers to entry Technological Patent: A license that gives the inventor of a new product the exclusive right to sell it for a certain period of time (20 years)

  17. Conditions that lead to a Monopoly: Franchises and Licenses Franchise:the right to sell a good or service w/in an exclusive market (national parks, schools) License:a govt. issued right to operate a business (radio/tv)

  18. Conditions that lead to a Monopoly: Industrial Organizations When the govt. allows companies to restrict the number of firms in a market (NFL, MLB, MLS)

  19. Price Discrimination-Each person has his own maximum price.Pricing policy for different groups.Ex: Discounted airfares, manufacturer’s rebates, senior citizen or student discounts, fly free / stay free promotions.

  20. Limits to Price Discrimination:1. You must have market power to do it.2. You must have distinct customer groups.3. You must have difficulty reselling the product

  21. Imperfect Competition • Oligopoly A market structure where the 4 largest firms dominate 70-80% of the output.

  22. Imperfect Competition 2. Oligopoly This is a challenge to the govt. who worry about firms working together to form a monopoly. Ex: Price Leadership, Collusion, Cartels

  23. Imperfect Competition 3. Monopolistic Competition A market structure in which many companies sell products that are similar but not identical

  24. Imperfect Competition • Many Firms • Few artificial barriers to entry • Slight control over price because of slight differences • Differentiated Products Monopolistic Competition Conditions

  25. Imperfect Competition 3. Monopolistic Competition: Firms try to compete in areas other than price called “non-price competition”. Examples: 1. Physical characteristics 2. Location 3. Service Level 4. Advertising, image, or status

  26. Government and Competition The government encourages competition through : • Anti-Trust Laws • Regulating Business Practices • Breaking up Monopolies • Blocking Mergers • Deregulating some industries

  27. Economics Unit 3 Chapter 8 BUSINESS ORGANIZATIONS

  28. Sole Proprietorships A business owned and managed by a single individual 75% of all businesses that generate only 6% of sales.

  29. Advantages vs. Disadvantages for a Sole Proprietorship:

  30. Partnerships A business organization owned by two (2) or more persons who agree on a specific division of responsibilities and profits 7% of all businesses that generate only 5% of sales.

  31. Partnerships 1. General Partnership Partnership in which partners share equally in both responsibility and liability

  32. Partnerships 2. Limited Partnership Silent Partner Partnership in which only one partner is required to be a general partner. The non-general partners are called limited partners and can only lose their investment. The general partner(s) are fully liable.

  33. Partnerships 3. Limited Liability Partnership (LLP) Partnership in which all partners are limited partners who can function like general partners. Example – Doctors, Attorneys, Accountants

  34. Advantages vs. Disadvantages for a Partnership:

  35. Corporations A legal entity owned by individual stock holders who elect a board of directors to make decisions for the owners. Nearly 20% of all businesses that generate nearly 90% of sales.

  36. Corporations Owners are stock holders who own stock (certificate of ownership in a corporation). The more stock you buy, the larger ownership you have in the company.

  37. Corporations 2 Types: • Closely Held Corporations: issue stock to only a few people; often family and friends. • Publically Held Corporations: Sell stock on the open market.

  38. Advantages vs. Disadvantages for a Corporation:

  39. Corporations Corporate Mergers/Combinations: • Horizontal Mergers-merging of 2 or more firms competing in the same market with the same good or service. • Vertical Mergers-merging of 2 or more firms involved with different stages of production on the same good or service. • Conglomerates-merging 3 or more businesses that make unrelated products.

  40. Corporations Multinational Corporations (MNC’s): Large corporations that produce and sell goods and services throughout the world.

  41. Other Organizations Business Franchise: semi-independent business that pays fees (royalties) to a parent company (franchisers) in return for the exclusive right to sell a certain product or service in a given area.

  42. McDonald’s franchise example • $500,000.00 in cash assets to be considered. • $45,000.00 initial investment. • Total investment between $1 million to 1.9 million. • Must pay 25% to 40% down on store. • Balance paid off in no more than 7 years. • 4% to 5% of sales monthly – royalties paid. • Rent – based on sales or flat amount. • Additional national advertising expenses.

  43. Top 10 Franchises for 2012 Top 10 Franchises of 2011 Hampton Hotels Subway 7 eleven ServPro Days Inn McDonalds Denny’s H& R Block Pizza Hut Dunkin Donuts Hampton Hotels Ampm McDonalds 7 eleven Supercuts Days Inn Vanguard Cleaning Systems ServPro Subway Denny’s

  44. Other Organizations Cooperative: A business organization owned and operated by a group of individuals for their mutual benefit. • Consumer Cooperatives: retail outlet owned and operated by the consumers • Service Cooperatives: Provides a service rather than a good. • Producer Cooperatives: Agricultural marketing cooperative that helps members sell products

  45. Other Organizations Nonprofit Organizations: Institution that functions much like a business but does not operate for the purpose of generating profits but for the benefit of society. -Tax Exempt from Income Taxes -Usually provide services vs. goods Ex: churches, museums, public schools, American Red Cross, Hospitals, Adoption Agencies, Synagogues, YMCA, etc.

  46. Other Organizations Other Non-Profits: • Professional Organizations • Business Associations • Trade Associations • Labor Unions

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