1 COMPETITION AND MARKETS BEFORE YOU BEGIN Looking at the Fill in the blank spaces with the missing words. Market Structures Perfect Competition sellers product No barriers to entry Price taker Produce where MR = MC Monopoly One seller Unique product (no substitutes) Extremely high barriers to entry Price Produce where MR = MC Monopolistic Competition sellers products No barriers to entry Price Produce where MR = MC Oligopoly Few sellers Identical or slightly different products High barriers to entry Price Produce where Study Guide 1 NTC/Contemporary Publishing Group, Inc.
2 Outlining the Look over the chapter paying attention to the main topics and concepts. As you look over each section of the chapter, fill in the missing words in the outline below. I. Perfect Competition A. Characteristics of perfect competition 1. There are buyers and sellers. 2. All firms sell goods. 3. Buyers and sellers have all relevant about prices, product quality, sources of supply, and so on. 4. There is easy into the market and easy out of the market. B. Sellers in a perfectly competitive market are price takers. 1. A price taker is a seller that can sell its output at equilibrium price, but can sell of its output at any higher price. C. Price takers will not sell for than equilibrium price. 1. There is no monetary incentive to sell one s product at than equilibrium price. The firm does better by selling at equilibrium price. D. If firms in a market are price takers, it is considered to be. E. What does a perfectly competitive firm do? 1. It produces where marginal equals marginal. 2. It must sell its product at the since it is a price taker. F. Profit in a perfectly competitive market 1. Profit acts as a to firms not in the market to enter the market. 2. As new firms enter the market, they the supply of the good that is earning profit, and thus its price. 3. As they lower its price, the firms profits. 4. The process ends when there is no longer an incentive for firms to enter the market to obtain profit. Study Guide 2 NTC/Contemporary Publishing Group, Inc.
3 II. Monopoly A. Characteristics of monopoly 1. There is. 2. The single seller sells a product for which there are no close. 3. There are extremely high, which means that entry into the market is extremely difficult. B. Monopolists are unlike perfect competitors in a fundamental way. 1. The monopoly firm is a price, or a firm that can sell at least some of its product at various prices. 2. A price has to take the equilibrium price and sell its product at this price, but the price can choose from various prices. 3. The monopoly firm, like any firm, will produce that quantity of output at which marginal equals marginal. 4. The monopoly then charges the price at which it can sell its entire output. 5. The monopoly must for the best price through a process of trial and error. C. The monopolist is limited in the price it charges by the height of the curve it faces. D. A monopoly seller is not guaranteed profits. E. Types of to 1. barriers include public franchises, patents, and copyrights. 2. Extremely low total cost (low per-unit cost) a. A company that ends up the only seller of a good because of its low average total cost is called a. 3. Exclusive of a scarce resource F. Government monopoly and market monopoly 1. A government monopoly refers to monopolies that are legally from competition. 2. A market monopoly refers to monopolies that are not legally protected from competition. III. Monopolistic Competition A. Characteristics of monopolistic competition 1. There are buyers and sellers. 2. Firms produce and sell products. 3. There is entry into and exit from the market. Study Guide 3 NTC/Contemporary Publishing Group, Inc.
4 B. Monopolistic competitive firms are price. 1. Monopolistic competitive firms produce and sell slightly different products so they are price. 2. They can sell at least some of their product at various prices. C. What do monopolistic competitive firms do? 1. Monopolistic firms produce the quantity of output at which marginal equals marginal. 2. Monopolistic firms search for the price per-unit that it can sell its entire output. D. How are monopolistic competitors products different? 1. Monopolistic firms can be different in any way that is perceived as different by. 2. How the product is packaged, where it is purchased, from whom it is purchased, and whether or not it is delivered may make a difference to consumers. E. Many monopolistic competitors would rather be monopolists. 1. A monopolistic competitor may, through, persuades buyers that her product is much different from competitors. The firm then stands a better chance of becoming a monopolist. F. Competition is what matters. 1. The degree of competition that a seller faces depends on the following two important factors: 2. How a seller s product is 3. How it is for new sellers to enter the market IV. Oligopoly A. Characteristics of oligopoly 1. There are sellers. 2. Firms produce and sell either or products. 3. There are barriers to entry, which means that entry into the market is difficult. B. Oligopoly firms are price. C. The competition an oligopoly faces depends on the of its product and of entry from new sellers. D. Identifying oligopolistic industries Study Guide 4 NTC/Contemporary Publishing Group, Inc.
5 1. Economists determine whether a market is oligopolistic by the of sales accounted for by the top four firms in the industry. 2. If only a firms account for a large of sales, then the market is considered oligopolistic. E. Oligopoly and 1. Oligopolies are more likely to base behavior on what the other sellers do than if he is one of many sellers in a competitive market. F. are agreements among firms that specify that they will act in a coordinated way to the competition between them and raise their. G. In the United States, agreements are illegal. Study Guide 5 NTC/Contemporary Publishing Group, Inc.
6 Building Vocabulary Fill in the blank spaces below with the correct terms from the following list of economic concepts. barrier to entry cartel agreement monopolistic competition monopoly natural monopoly oligopoly perfect competition price taker price searcher public franchise 1. A right granted to a firm by government that permits the firm to provide a particular good or service and excludes all others from doing so is referred to as a. 2. A is a seller that can sell some of its output at various prices. 3. When one firm has such a low average total cost (per-unit cost) that only it can survive in the market, this firm is known as a. 4. In there are many buyers and many sellers, sellers produce and sell slightly differentiated products, and there is easy entry into and easy exit out of the market. 5. A market structure in which there are few sellers, sellers produce and sell either identical or slightly differentiated products, and there are significant barriers to entry is an. 6. Anything that prohibits a firm from entering a market is a.. A specifies that firms will act in a coordinated way to reduce the competition between them. 8. A seller that can sell all of its output at the equilibrium price, but can sell none of its output at any other price is a. 9. In there are many buyers and many sellers, all firms sell identical goods, buyers and sellers have all relevant information about buying and selling activities, and there is easy entry into the market and easy exit out of the market. 10. A market structure in which there is a single seller, the seller sells a product for which there are no close substitutes, and there are extremely high barriers to entry is a. Study Guide 6 NTC/Contemporary Publishing Group, Inc.
7 Illustrating Economic Skills The chart below compares the four major market structures. Complete the blank spaces. Perfect Monopolistic Oligopoly Monopoly Competition Competition Competition Number of Sellers many many Type of slightly identical or Product differentiated slightly differentiated Barriers to Entry Control over Price Example of a Firm in this market type Study Guide NTC/Contemporary Publishing Group, Inc.
8 Using Economic Concepts The local farmers in Farmsville come together each week to sell their harvest at the Farmer s Market. Answer the following questions referring to concepts discussed in chapter seven. 1. Describe how this market might represent a competitive market. 2. There are a number of artichoke sellers at the market. Do you think the price for artichokes will vary much between sellers? 3. Suppose the artichoke farmers agree one day to raise their price to a certain amount. Do you think their agreement will last? Farmsville Farmer s Market Study Guide 8 NTC/Contemporary Publishing Group, Inc.
9 AS YOU REVIEW Practicing for the Test True or False: For each description place a T in the blank if the statement is true and an F if the statement is false. 1. A natural monopoly is a right granted to a firm by the government that permits the firm to provide a particular good or service and excludes all others from doing so. 2. A government monopoly is legally protected from competition. 3. A monopoly is a price taker. 4. Firms in perfect competition can sell all of their output at the market equilibrium price. 5. A monopolistic firm can gain higher profits if it can differentiate its product from its competition. 6. A cartel is a group of firms that agree to act as perfect competitors.. Oligopolistic firms are price searchers because they may sell identical products and entry into the market is easy. 8. A perfectly competitive firm could increase its profits by selling its product for less than equilibrium price. 9. A monopoly searches for the highest possible price to charge buyers. 10. A monopolistic firm produces and sells 50 units of a good at a price of $5 per unit. Its total cost is $300. The firm s profits are $50. Short Answer: 1. Why do cartels tend to occur in oligopolistic markets and not perfectly competitive markets? Study Guide 9 NTC/Contemporary Publishing Group, Inc.
10 2. Cartels are illegal in the United States. What happens to price when a cartel is broken up? 3. Why won t a monopoly charge the highest possible price? Study Guide 80 NTC/Contemporary Publishing Group, Inc.