Chp. 7: Market Structures and Market Failures

Transcription

1 Chp. 7: Market Structures and Market Failures

2 Objectives In the course of studying Chp.7: Market Structures and Market Failures, we will p. 002 explain the characteristics that define market structure. compare the behavior of firms and buyers in perfect competition, monopoly, oligopoly, and monopolistic competition. synthesize information from industry case studies and categorize those industries by market structure. apply the four characteristics of market structures to determine the market structure of a particular industry. explain why externalities occur and describe the problem of public goods.

3 Preview Scenario 1 Open a video game store in a small town that has many other successful video game stores. Scenario 2 Begin the first and only, babysitting service in your neighborhood. Scenario 3 Start a music store in a small town that has only two other music stores. Review the scenarios and decide under which conditions you would prefer to start your business. Give at least two reasons to justify your selection. Scenario 4 Create a unique clothing line that targets teenagers.

4 Perfect Competition Number of Producers Many producers and consumers. p. 003 Similarity of Products Virtually identical from producer to producer. Commodity a product that is exactly the same no matter who produces it. (EX grains, cotton, sugar, oil) Perfect Competition Ease of Entry Very easy to enter the market. Existing producers will face competition and no single producer can dominate the market. Control over Prices Producers have no market power ability to influence prices.

5 Perfect Competition p. 003 Furthermore, consumers have easy access to information about products and prices, producers are forced to be as efficient as possible, and consumers always get to pay the equilibrium price. Obstacles to new businesses entering the industry include start-up costs, control of resources, and technology. Benefits of Perfect Competition 1. Forces producers to as efficient as possible 2. Consumers do not pay more than what a product is worth. Examples of Perfect Competition Hard to find except in the agricultural industry. Thousands of farmers = thousands of producers

6 Perfect Competition Number of Producers Have many producers or sellers. p. 004 Similarity of Products Firms try to distinguish their products from the goods of other firms. Monopolistic Competition Ease of Entry It s easy to enter the market. Control over Prices Have some control over prices because producers can control the brand name, but only a little. There are close substitutes.

7 Monopolistic Competition p. 004 What is non-price competition? Using things other than changing the price to attract consumers. Changing physical characteristics, different types of service, location, status and image. Examples of Monopolistic Competition Fast food restaurants, Shoe Companies

8 Oligopoly Number of Producers Small number of producers. The 4 top producers control 60% of total output. p. 004 Similarity of Products Products are essentially the same, with only minor variations. Oligopoly Ease of Entry High barriers to entry. Control over Prices Have some control over prices. Firms are interdependent in setting prices.

9 Oligopoly p. 004 Because an oligopoly dominates the market, its effect may be much like that of a monopoly. Illegal collusion may occur, and cartels may be created.

10 Monopoly Number of Producers One producer with no competition. p. 005 Similarity of Products Unique product with no substitutes. Monopoly Ease of Entry High barriers to entry. Control over Prices Substantial control over prices.

11 Monopolies p. 005 Monopolies are often illegal, although governments may allow beneficial monopolies to exist. What are the Three types of Legal Monopolies? 1. Resource monopolies rare; exist when one producer controls a key natural resource 2. Government-Created Monopolies created when the government grants a single firm or individual 3. Natural Monopolies when a single firm can supply a good or service more efficiently and at a lower cost than two or more

12 What are Market Failures? p Government regulations aim to remedy market failures. A market failure occurs when the market forces of supply and demand do not lead to the output society desires. 2. The four primary sources of market failures are as follows: Public goods are available for everyone to consume, whether or not those people pay for them, and are defined as being nonexcludable and nonrival in consumption. The market fails to provide public goods because private firms cannot make people pay for their use (the free-rider problem); thus the government must provide them. Externalities are spillover costs or benefits that affect someone other than the producer or consumer. Externalities exist when some of the costs and the benefits of a product fall on someone other than the producers or the consumers of the product (e.g., air and water pollution, noisy neighbors). The market cannot solve this; sometimes the government does (e.g., Environmental Protection Agency).

13 What are Market Failures? p. 005 Market power occurs when a shortage of competition results in rising prices. Government may pass laws such as the Sherman Antitrust Act and regulate through agencies like the Federal Trade Commission. It may regulate natural monopolies, such as electrical utilities. Inequity exists because markets reward people according to their effort and skills. People without skills, or who cannot work, are likely to be poor. Governments often redistribute income in order to alleviate poverty. 3. A government failure occurs when the cost of solving a market failure is greater than the benefit.

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