Market Structures and Market Failures Chapter 7 What

Market Structures and Market Failures Chapter 7

What is perfect competition, and why do economists like it so much? l Businesses operate in different market structures, which are primarily defined by the degree of competition among producers.

What is perfect competition, and why do economists like it so much? l Four characteristics are used to categorize market structures: – Number of producers – Similarity of products – Ease of entry – Control over prices

What is perfect competition, and why do economists like it so much? l Perfect competition includes these beneficial characteristics: – – Many producers and consumers Identical products Easy entry into the market Prices determined by supply and demand

What is perfect competition, and why do economists like it so much? l easy access to information about products and prices l producers are forced to be as efficient as possible l consumers always get to pay the equilibrium price

What is perfect competition, and why do economists like it so much? l Remember: – These four structures are only models. – Markets can be a mix of more than one structure – Market structure may also evolve over time sue to technological innovations, new entrants, or changes in

What is a monopoly, and why are some monopolies illegal? l Monopolies, oligopolies, and monopolistic competition do not allocate resources efficiently l A monopoly is a market in which a single producer provides unique products.

What is a monopoly, and why are some monopolies illegal? l It usually has significant control over prices and less incentive to satisfy consumers, making it the opposite of perfect competition. l Monopolies are often illegal, although governments may allow beneficial monopolies to exist.

What is a monopoly, and why are some monopolies illegal? l Remember: – Why do you think governments allow monopolies on cable, water, phone companies, mail, etc. to exist? – Most are natural economies that exist from economies of scale.

What is an oligopoly, and how does it limit competition? l An oligopoly is a market in which a small number of producers provide similar, but not identical, goods. l Firms in an oligopoly have some control over prices but often set them in response to the decisions of other firms.

What is an oligopoly, and how does it limit competition? l Because an oligopoly dominates the market, its effects may be much like that of a monopoly. l Illegal collusion may occur, and cartels may be created.

What is an oligopoly, and how does it limit competition? l Note: – Monopoly and oligopoly are based on Greek roots: l Mono=single l Olig=few

What is monopolistic competition, and how does it effect markets? l Monopolistic competing is a market in which many producers provide similar but carried goods. l Such markets are characterized by both price and nonprice competition, in which firms compete through differentiated product characteristics, service, location, and brand image.

What is monopolistic competition, and how does it effect markets? l To the extent that firms are able to monopolize their own brands, they may have some control over prices. l However, such markets remain relatively competitive

What is monopolistic competition, and how does it effect markets? l Remember: – Because producers have no market power in perfect competition, they seek to differentiate themselves and sell a “unique” product. – The resulting market structure is monopolistic competition

Market Failures: What are externalities and public goods? l When markets do not allocate goods and services efficiently, economists refer to them as market failures. l Market failures include three imperfect market structures discussed in the earlier sections, along with externalities and public

Market Failures: What are externalities and public goods? l Externalities are spillover costs or benefits that affect someone other than the producer or consumer. l Negative externalities, such as pollution, tend to happen because producers are not paying the gull cost of their actions. l Positive externalities have the opposite problemthey are under produced.

Market Failures: What are externalities and public goods? l Public goods are available for everyone to consume, whether or not those people pay for them, and are defined as being nonexcludable and nonrival consumption. l The market fails to provide public goods because private firms cannot make people pay for their use (free rider); thus the government must provide for them.

Market Failures: What are externalities and public goods? l Remember: – – – Think of the extras in externalities as unintended consequences. If you landscape your own yard, you will make more when you sell your house, and the buyer will get better property. However, you are also unintentionally increasing the market value of other homes of the neighborhood- a positive externality.