ECO110HA: Module 6 AVP Transcript Title: Firm Decisions and the Pursuit of Profit. Title Slide. Narrator: Firm Decisions and the Pursuit of Profit.

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1 ECO110HA: Module 6 AVP Transcript Title: Firm Decisions and the Pursuit of Profit Title Slide Narrator: Firm Decisions and the Pursuit of Profit. Slide 2 Title: Market Structures Characteristics Number of firms Barriers to entry Structures Perfect competition Monopolist Monopolistic competition Oligopoly Image: Sky scraper buildings on a river with a boat in front of them. Narrator: When trying to define what type of market a firm operates in, the two most important characteristics are the number of firms and barriers to entry. Depending on the characteristics, a market can be defined as one of four general structures: perfect competition, monopolist, monopolistic competition, or oligopoly. Slide 3 Title: Perfect Competition A market structure in which the decisions of individual buyers and sellers have no effect on market price A firm in this industry is called a price taker Cannot affect the price of the product it sells The firm is such a small part of the total industry All firms sell identical products No barriers to entry Profits will not last long Fierce competition Image: Photo of a farm. Narrator: Perfect Competition is a market structure in which the decisions of the individual buyers and sellers have no effect on market price. What we mean by this is that a firm in this type of industry is called a price taker. The firm cannot affect the price of the product it sells. The reason for this is because the firm is such a small part of the total industry, and because all the firms in this industry sell identical products. There are no barriers to entry in this type of industry, however. Any new firm can decide to enter or exit at any time. This means that profits will not last long in this market structure as competition is fierce. The closest example to perfect competition is found in agriculture, specifically those industries with many small-scale farmers.

2 Slide 4 Title: Monopoly Single supplier of a good or service for which there is no close substitute Constitutes its entire industry Operate with high barriers to entry Prevents competitors from entering the market Maintain profits as long as the barriers hold Control over an essential resources or patents This firm is called a price maker or price searcher Image: Red symbol. Narrator: A monopolist is the single supplier of a good or service for which there is no close substitute. The monopolist constitutes its entire industry. They operate with high barriers to entry, which prevents competitors from entering the market. This means that they can maintain their profits as long as the barriers hold. Barriers to entry include such things as the control over an essential resource or even the existence of patents. This firm that has such market power is called a price maker or price searcher. An example of a monopoly would be when a firm holds a patent on a certain pharmaceutical drug. Slide 5 Title: Natural Monopoly Monopoly that arises from the fact that one firm can produce at a lower average total cost (ATC) than if multiple firms split up the industry Does not have to do with ownership of a natural resource ATC falling as more units are produced due to high set-up costs Image: Photo of an outdoor power grid. Narrator: A natural monopoly is a monopoly that arises from the fact that one firm can produce at a lower average total cost than if multiple firms were to split up the industry. This does not have to do with the ownership of a natural resource; rather, it s about the average total cost falling as more units are produced. These types of monopolists typically have high set-up costs, and the more units they produce the more they can spread out the costs. An example of a natural monopoly is your local power company. Slide 6 Title: Monopolistic Competition Many firms where each firm is a small part of the total industry Sells a differentiated product from its competitors Gives some ability to affect the price of the product Some market power Raise price without losing all customers No barriers to entry Profits will not last long Fierce competition

3 Image: Walmart logo. Narrator: Monopolistic competition is a market structure where there are many firms, but each firm is a small part of the total industry. This type of firm sells a differentiated product from its competitors, giving it some ability to affect the price of the product. This means that firms in this market structure have some market power. That is, they can raise the price of the product and not lose all of their customers. However, in this industry there are no barriers to entry, therefore profits will not last long in this market structure because competition is fierce. An example of this market structure is clothing retail stores or pizza parlors. Slide 7 Title: Oligopoly Very few sellers and firms are interdependent Each seller knows that the other sellers will react to its changes in prices, quantities, qualities, etc. Keep a close eye on the behavior of rival firms Engage in strategic decision making If they explicitly collude: Cartel Illegal in U.S. Implicit collusion is harder to prove Large barriers to entry Can maintain profits Image: Photo of a radio tower. Narrator: An oligopoly is a market structure in which there are very few sellers and the firms are interdependent. Each seller knows that the other sellers in the industry will react if it changes the prices, quantities, qualities, etc. of the product it sells. Firms in this industry keep a close eye on the behavior of rival firms and engage in strategic decision making. If they explicitly collude we call this structure a cartel. Cartels are illegal in U.S. Implicit collusion, however, is harder to prove and can occur in many industries. Given that a few, large firms dominate this industry, large barriers to entry exist and so these firms can maintain their profits by keeping competition out. An example of an oligopoly in the U.S. would be the domestic auto makers or wireless providers. Slide 8 Title: Comparing Market Structures

4 Narrator: We can summarize the main characteristics of each structure in this table. We ve talked about each of these characteristics briefly. Firms that have market power are able to restrict their output to raise prices, and barriers to entry allow firms to keep competitors out and maintain their profits in the long run. If you remember from an earlier module, we undertake decisions up to the point where marginal benefits equal marginal costs. For firms, the marginal benefits are actually marginal revenue. This is why we say firms produce up into the point where MR=MC (or marginal revenue equals marginal costs). All firms do this, but remember oligopolies are interdependent and make strategic decisions. Slide 9 Title: Your Turn to Think About It How do barriers to entry, which limits competition, affect the size of a firm within an industry and the amount of market power it has? How does the amount of power a firm has affect the price you pay? Can you think of examples where you felt you had limited choices and faced higher prices? Image: Photo of a girl thinking. Narrator: How do barriers to entry, which limits competition, affect the size of a firm within an industry and the amount of market power it has? How does the amount of power a firm has affect the price you pay? Can you think of examples where you felt you had limited choices and faced higher prices? Slide 10 Title: Your Turn to Put It in Action! Can you think of examples in your hometown of firms that operate in perfect competition, monopolistic competition, oligopoly, and monopoly? Image: Collage of images including a farm, Gap logo, business man, and a radio tower.

5 Narrator: Can you think of examples in your home town of firms that operate in perfect competition, monopolistic competition, oligopoly, and monopoly? Make sure to review the characteristics we mentioned for each market structure to see if your examples fit with the descriptions! Slide 11 End of presentation.

CHAPTER 8: SECTION 1 A Perfectly Competitive Market

CHAPTER 8: SECTION 1 A Perfectly Competitive Market Four Types of Markets A market structure is the setting in which a seller finds itself. Market structures are defined by their characteristics. Those