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Market Structures

Market Structures. Perfect Competition. Characteristics Many sellers with identical goods and services – goods are perfect substitutes for each other (no particular seller has any large impact on the market) No seller has price setting ability but rather MUST take the price the market sets

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Market Structures

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  1. Market Structures

  2. Perfect Competition • Characteristics • Many sellers with identical goods and services – goods are perfect substitutes for each other (no particular seller has any large impact on the market) • No seller has price setting ability but rather MUST take the price the market sets • Easy to enter and exit a market • Perfect information – all firms know each others costs and the prices they charge • All firms have same access to resources • Consumers want to maximize satisfaction & Producers want to maximize profits

  3. In PC market structure, firms DO NOT earn more than a normal profit (they do not cover opportunity costs – only out of pocket costs) • Excess profits act as a signal to other firms to enter the market thus lowering price as supply increases and wiping out extra profits Examples of PC Market • Agriculture • Stock Market

  4. Monopoly • Mono means “ONE” so a monopoly is a market with only 1 seller of a good or service • Characteristics: • Lack of competition amongst sellers and lack of substitutes for the good/service • Barriers to entry: high cost of entering the market • Firms are “price makers” – they control the supply and so can influence the price they charge – HOWEVER they CAN NOT charge any price they want – the Law of Demand STILL APPLIES • Better information than other firms or the consumers • Less efficient than a competitive market so have lower quantities available and higher prices

  5. Natural Monopoly • This is a monopoly where it makes more sense – it is more efficient to have only 1 seller of a good or service • The cost of competition makes it too expensive and unprofitable to have more than 1 seller • Examples are utilities

  6. Monopolistic Competition • A firm that is able to influence the market price of its product by altering the rate of production of the product • There are many producers and many consumers in a given market. • Products are similar but NOT identical (differentiated) • Sellers have SOME control over the price of the good they charge • Few barriers to exit or entry from the market

  7. Oligopoly • An industry dominated by only a few sellers • Each seller is aware of the actions of the others and this influences how they act (called interdependence) • Oligopoly markets can include collusion – the act of collaborating or cooperating with your competitors to set production limits and influence prices • Sellers typically use non-price competitive methods to make their product stand out

  8. Oligopoly Examples • Auto industry • Soda industry • Airline industry

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