7-1: PERFECT COMPETITION NOTES

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1 7-1: PERFECT COMPETITION NOTES

2 LEARNING TARGETS 1. I WILL DEMONSTRATE MY UNDERSTANDING OF THE CHARACTERISTICS OF PERFECT COMPETITION AND MONOPOLIES.

3 MARKET STRUCTURES MARKET STRUCTURE: AN ECONOMIC MODEL OF COMPETITION AMONG BUSINESSES IN THE SAME INDUSTRY

4 MARKET STRUCTURES ECONOMISTS CLASSIFY MARKETS BASED ON SEVERAL FACTORS: THE NUMBER OF PRODUCERS: THIS HELPS DETERMINE THE LEVEL OF COMPETITION; MORE PRODUCERS MEANS A MARKET IS MORE COMPETITIVE THE SIMILARITY OF PRODUCTS: THE MORE SIMILAR THE PRODUCT, THE MORE COMPETITION THAT EXISTS

5 MARKET STRUCTURES THE EASE OF ENTRY: HOW EASY IS IT TO ENTER A PARTICULAR INDUSTRY AND START A NEW BUSINESS CONTROL OVER PRICES: THE MORE COMPETITIVE THE MARKET IS, THE LESS CONTROL OVER PRICES PRODUCERS WILL HAVE

6 PERFECT COMPETITION THE MOST COMPETITIVE MARKET STRUCTURE IS PERFECT COMPETITION IN THIS MARKET STRUCTURE, FIRMS ESSENTIALLY PRODUCE THE SAME PRODUCT

7 ALL GOODS ARE SOLD AT EQUILIBRIUM PRICE OR MARKET PRICE IN THE REAL WORLD, THIS MARKET STRUCTURE IS RARE EXAMPLES: THE WHEAT, CORN, TOMATO, AND MILK INDUSTRIES

8 CHARACTERISTICS OF PERFECT COMPETITION 1. NUMEROUS BUYERS AND SELLERS NO SINGLE BUYER OR SELLER HAS THE POWER TO CONTROL THE PRICE IN THE MARKET BUYERS HAVE LOTS OF OPTIONS SELLERS ARE ABLE TO SELL THEIR PRODUCTS AT MARKET PRICE

9 CHARACTERISTICS OF PERFECT COMPETITION 2. STANDARDIZED/IDENTICAL PRODUCT A PRODUCT THAT CONSUMERS SEE AS IDENTICAL REGARDLESS OF THE PRODUCER

10 CHARACTERISTICS OF PERFECT COMPETITION 3. FREEDOM TO ENTER AND EXIT THE MARKET PRODUCERS FACE FEW RESTRICTIONS IN ENTERING THE MARKET ALL FIRMS FACE COMPETITION AND NO SINGLE FIRM CAN DOMINATE THE MARKET

11 CHARACTERISTICS OF PERFECT COMPETITION 4. PRODUCERS HAVE NO CONTROL OVER PRICES THEY ARE PRICE TAKERS BECAUSE THEY MUST ACCEPT THE MARKET PRICE FOR THEIR GOOD IF A PRODUCER TRIES TO SELL A GOOD OVER MARKET PRICE, HE/SHE WILL NOT SELL ANY UNITS

12 CHARACTERISTICS OF PERFECT COMPETITION 5. EASY ACCESS TO INFORMATION ABOUT PRODUCTS AND PRICES BUYERS COMPARE PRICES PRODUCERS KNOW WHAT CONSUMERS ARE WILLING TO PAY FOR GOODS

13 7-2: MONOPOLIES

14 IMPERFECT COMPETITION ECONOMISTS DEFINE IMPERFECT COMPETITION AS ANY MARKET STRUCTURE IN WHICH PRODUCERS HAVE SOME CONTROL OVER THE PRICE OF THEIR PRODUCTS THE MOST EXTREME VERSION OF IMPERFECT COMPETITION IS A MONOPOLY

15 CHARACTERISTICS OF MONOPOLIES 1. ONE PRODUCER: THERE IS NO COMPETITION IN A MONOPOLY 2. UNIQUE PRODUCT: GENERALLY, IT IS THE ONLY PRODUCT OF ITS KIND THERE ARE NO SUBSTITUTES AND NO OTHER PRODUCERS PROVIDE SIMILAR GOODS OR SERVICES

16 CHARACTERISTICS OF MONOPOLIES 3. HIGH BARRIERS TO ENTRY: PREVENTS OTHER FIRMS FROM TRYING TO ENTER THE MARKET 4. SUBSTANTIAL CONTROL OVER PRICE: MONOPOLIES ARE PRICE MAKERS SINCE THEY CONTROL THE SUPPLY OF A GOOD

17 MONOPOLIES A PURE MONOPOLY IS RARE IN TODAY S ECONOMY HISTORICALLY, STANDARD OIL IS AN EXAMPLE OF A MONOPOLY WITH THE DEVELOPMENT OF ANTI-TRUST LAWS THE COMPANY WAS LATER BROKEN UP

18 MONOPOLIES THERE ARE ALSO LEGAL MONOPOLIES THAT THE GOVERNMENT ALLOWS TO EXIST UNDER CERTAIN CIRCUMSTANCES GOVERNMENT MONOPOLY: EXISTS BECAUSE THE GOVERNMENT EITHER OWNS AND RUNS THE BUSINESS OR AUTHORIZES ONLY ONE PRODUCER EXAMPLE: U.S. POSTAL SERVICE

19 MONOPOLIES NATURAL MONOPOLY: WHEN A SINGLE FIRM CAN SUPPLY A GOOD OR SERVICE MORE EFFICIENTLY AND AT A LOWER COST THAN TWO MORE COMPETING FIRMS CAN EXAMPLE: PUBLIC UTILITIES: GAS, WATER, CABLE, AND ELECTRICITY

20 MONOPOLIES A NATURAL MONOPOLY OCCURS WHEN A PRODUCER CAN TAKE ADVANTAGE OF ECONOMIES OF SCALE TO DOMINATE A MARKET ECONOMIES OF SCALE MEANS THAT A FIRM DECREASES ITS COSTS OF PRODUCTION AS IT INCREASES ITS OUTPUT

21 MONOPOLIES GEOGRAPHIC MONOPOLY: EXISTS WHEN THERE ARE NO OTHER PRODUCERS WITHIN A CERTAIN REGION EXAMPLE: A GENERAL STORE IN A SMALL TOWN (HAVING MORE THAN ONE STORE WOULD MAKE MULTIPLE STORES LOSE MONEY)

22 MONOPOLIES TECHNOLOGICAL MONOPOLY: WHEN A FIRM CONTROLS A MANUFACTURING METHOD, AN INVENTION, OR A TYPE OF TECHNOLOGY THE FIRM MIGHT HAVE A PATENT: EXCLUSIVE RIGHTS TO THAT INVENTION OR PROCESS FOR A CERTAIN NUMBER OF YEARS EXAMPLE: PRESCRIPTION DRUGS

23 MICROSOFT, APPLE, AND GOOGLE LIST THE PRODUCTS AND SERVICES THAT COME TO MIND WHEN YOU THINK OF MICROSOFT, APPLE, AND GOOGLE. DO ANY OF THESE COMPANIES FIT THE DESCRIPTION OF A MONOPOLY?

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