Chapter 7 Market Structure Section 1 Competition and

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Chapter 7 Market Structure Section 1 Competition and Market Structures

Chapter 7 Market Structure Section 1 Competition and Market Structures

Lesson 1: Competition and Market Structure Essential How Question: do varying market structures impact

Lesson 1: Competition and Market Structure Essential How Question: do varying market structures impact prices in a market economy?

What Are Markets? A market is where buyers and sellers: meet to exchange goods

What Are Markets? A market is where buyers and sellers: meet to exchange goods and services. are affected by some level of competition.

Market Structure Characterized by the degree of competition among business in the same industry

Market Structure Characterized by the degree of competition among business in the same industry Types of Competition: Pure (Perfect) Competition Monopolistic Competition Oligopoly Monopoly

Pure (Perfect) Competition When a large number of buyers and sellers exchange identical products

Pure (Perfect) Competition When a large number of buyers and sellers exchange identical products under five conditions 1. There should be a large number of buyers and sellers 2. The products should be identical 3. Buyers and sellers should act independently

Pure (Perfect) Competition (cont) 4. Buyers and sellers should be well- informed 5. Buyers

Pure (Perfect) Competition (cont) 4. Buyers and sellers should be well- informed 5. Buyers and sellers should be free to enter, conduct, or get out of business

Pure (Perfect) Competition (cont) Under a Pure Competition Supply and demand set the equilibrium

Pure (Perfect) Competition (cont) Under a Pure Competition Supply and demand set the equilibrium price Each firms sets a level of output that will maximize its profits at that price Imperfect Competition Refers to market structures that lack one or more of the five conditions

Monopolistic Competition Meets all conditions of perfect competition except for identical products Use product

Monopolistic Competition Meets all conditions of perfect competition except for identical products Use product differentiation Real or imagined differences between competing products in the same industry Use non-price competition Advertising, Sell giveaways, promotional campaigns within a narrow price range to try to raise the price = profit maximization

Examples of Monopolistic Competition Firms sell slightly differentiated products v. Differentiation may be color,

Examples of Monopolistic Competition Firms sell slightly differentiated products v. Differentiation may be color, packaging, store location, store design, store decorations, delivery, service…. . anything to make it stand out!

With your neighbor… Think about a monopolistically competitive company from which you have made

With your neighbor… Think about a monopolistically competitive company from which you have made a recent purchase. What are the substitutes’ prices? Why can there be a range of prices? did you purchase the one you did?

Oligopoly A few large businesses dominate an industry When one business makes a move,

Oligopoly A few large businesses dominate an industry When one business makes a move, the others usually follow Ex: a price war…cuts in airline ticket Sometimes results in collusion or price-fixing which is illegal Collusion: formal agreement to set prices Price-Fixing: charge the same

Monopoly One seller of a product that has no close substitutes Natural Monopoly Geographic

Monopoly One seller of a product that has no close substitutes Natural Monopoly Geographic Monopoly Technological Government Monopoly

Natural Monopoly – an industry in which economies of scale are so important that

Natural Monopoly – an industry in which economies of scale are so important that only one firm can survive. In other words, it is more efficient for there to be one firm in the industry. Example: Gas companies (we wouldn’t want multiple gas lines underground

Geographic Monopoly No other business chooses to compete in that area Ex: small town

Geographic Monopoly No other business chooses to compete in that area Ex: small town drugstore

Technological Monopoly Results from new discoveries and inventions. The government grants these monopolies through

Technological Monopoly Results from new discoveries and inventions. The government grants these monopolies through the issue of patents and copyrights Patents: inventions Copyrights: publish

Government Monopoly Involves products people need that private industry might not adequately provide

Government Monopoly Involves products people need that private industry might not adequately provide

Characteristics of Market Structures Market Structure # of Sellers Perfect Competition many identical Low

Characteristics of Market Structures Market Structure # of Sellers Perfect Competition many identical Low or Price none takers 1 Unique Extremely Price Monopoly Types of Products Monopolistic Competition Many Slightly differentiated Oligopoly Few sellers Identical or slightly differentiated Barriers to Control Entry Over Price high searchers Easy entry Difficult entry Price searchers Price Searchers Examples