Ch. 7: Market Structures

1. Ch. 7: Market Structures

2. Section 1: Perfect Competition • Competition balances free markets, but certain requirements need to be met for perfect competition to exist.

3. Perfect Condition • Perfect competition requires the following… • Many buyers and sellers participate • Sellers offer identical products • Buyers and sellers are well informed • Sellers are able to enter and exit the market freely/easily

4. 1. Many Buyers and Sellers • Having many producers and consumers creates choice, which brings down prices and improves products.

5. 2. Identical Products • In perfect competition, producers are selling identical products. • Commodity- a product that is the same regardless of who produces it (gas, corn, milk)

6. 3. Informed Buyers and Sellers • Consumers and producers need to be informed about products and pricing to ensure competition. • Internet has greatly advanced consumer information.

7. 4. Easy Entry and Exit • Producers need to be able to easily enter the market for there to be many sellers. • How easy is it to start a business?

8. Barriers to Entry • Barrier to entry: anything that causes difficulty to businesses trying to enter a market. • Excessive barriers to entry reduce the number of producers. • Start-up costs • Legal/certification requirements

9. Barriers to Entry • With your partner… • Consider to barriers to entry for your business. • List all start-up costs and legal requirements that you would need to overcome to create your business.

10. Barriers to Entry • High start-up costs and legal requirements make it difficult to enter the market. • America is ranked highly on the list of “ease in starting a business” list. • Limited number of legal “hoops”.

11. Section 2: Monopoly • Monopolization eliminates competition entirely.

12. Monopoly • A monopoly is a market that only has one supplier/producer. • Eliminates competition.

13. Monopoly examples • With a partner, think of examples of markets with only one provider of the good/service.

14. Microsoft?

15. How they form • Economies of scale: average cost per unit falls as production increases. • This makes big businesses more cost effective- enabling them to cut costs and absorb competitors.

16. John Rockefeller: Standard Oil • Practiced horizontal consolidation.

17. Andrew Carnegie: Carnegie Steel • Practiced vertical consolidation.

18. Natural Monopoly • An industry that operates most efficiently with just one provider. • Utilities: water, electric, natural gas • Roads

19. Government Monopoly • A monopoly created by the government. • Patents • Contracts

20. Patents • A patent is a license given to an inventor that gives them exclusive rights to sell their product. • Good for a limited period of time.

21. Funny inventions

23. Contracts and Franchising • Government often picks firms to make contracts with. • Company “X” is chosen to install and stock all school vending machines.

24. Section 3: Monopolistic Competition • Most markets are neither in perfect competition, nor monopolies, but somewhere in between.

25. Monopolistic Competition • Monopolistic competition is when many companies compete to sell products that are similar, but not identical.

26. Monopolistic Competition vsPerfect Competition • Both have many competing firms/producers • Both have few barriers to entry • However… • Perfect Competition is a market with identical products (commodities). • Monopolistic Competition is a market with differentiated products (most consumer goods).

27. Nonprice Competition • Monopolistic competitors can compete on factors other than price… • Physical characteristics • Location • Service level • Advertising, image, or status (popularity)

28. Oligopoly • Oligopoly is a market with only a few firms providing goods. • Occurs in markets with high barriers to entry. • Think: industries that would be realistically impossible for you to enter as a producer.

29. Collusion • Collusion is when members of oligopolies agree to set prices and production levels. • Collusion is illegal, because the effects are the same as a monopoly- elimination of competition.

30. Cartels • Cartels are organizations that form to coordinate prices and production. • Also illegal, and are often associated with the black market (drug cartel)

31. Section 4: Regulation and Deregulation • Government attempts to balance two competing interests… • Open, accessible markets for producers • Protection for consumers

32. Regulation vs. Deregulation • Too much regulation can make it difficult for producers to enter markets (raises barriers to entry) • Too little regulation can create monopolies and predatory business practices that end up hurting consumers.

33. Antitrust Laws • During the Industrial Revolution, many trusts were formed. • Trusts are like cartels and result in monopolization (Standard Oil Trust- Rockefeller) • Government eventually broke up these trusts.

34. Mergers • Mergers are when two or more companies combine into one. • Mergers are tightly regulated to avoid monopolization.

35. Deregulation • During the 1970s and 1990s, Congress passed numerous laws to deregulate, citing increased inefficiencies as a result of the laws.

36. Credit Crisis 2007-Present • Many cite deregulation of Wall Street investment banks as a cause of the banking collapse in 2007. • Lending was loosely regulated, and banks were able to knowingly make faulty loans.