Download Unit 7B: Explain how changes in the level of

Unit 7B: Explain how changes in the level of competition
can affect price and output levels.
MARKET BASICS: Four Conditions for Perfect
Competition- 1: Efficient market 2: Price and production
are low.
A: Market- a place where goods and services are bought
and sold.
1. Market price= the price paid by the buyer and
accepted by the seller.
2. Perfect competition: 4 conditions;
1. Many buyers & sellers in the marketplace
2. Sellers offer identical products. A commodity is a
product that is considered the same regardless of
who makes or sells it.
3. Buyers and sellers are well informed about products.
4. Sellers are able to enter and exit market.
B: IMPERFECT COMPETITION: Creates barriers to enter into a
market.
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High start up costs.
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Government regulations: restrictions on trade,
environmental restrictions, taxes.
Brand identity: Too many products that are similar, offer
choices to consumers and weaken consumer loyalty.
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Monopoly- a market w/ single supplier
◦ Natural –market runs efficiently provides all output ( electric
companies, water companies)
◦ Government – created by govt. ( patent, franchise, license Major League Baseball –all professional sports.
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Oligopoly- market dominated by a few large, profitable
firms. 4 largest firms produce at least 90% of output- air
travel, breakfast cereals, household appliances.
◦ Dangers- collusion, price fixing, price war –illegal in America
(OPEC) is an example on the world market.
3. NON-PRICE COMPETITION-competition through ways other than
lower prices.
Quality, style, color, size, shape, texture,
taste.
 Location
 Special Service
 Branding, image, or status
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4. Regulation and Deregulation
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Predatory pricing –selling a product below cost to drive
competitors out of the market
Regulate business practices-anti-trust laws (bust up
monopolies.
Block Mergers-stop two or more companies from
forming one company.
◦ Horizontal mergers- companies which produce same product in
same market. ( Exxon and Mobil joined became Exxon-Mobil.
Goodrich and Michelin merged now just Michelin Tire)
◦ Vertical merger- two companies at different levels or stages of
production join. ( A tire company and a car company, a grocery
store chain buys a dairy-the firm produces and sells the milk)
4. Continued
Conglomerates-companies of unrelated
products join together. Walt Disney, GE,
Johnson and Johnson
 Multi-national corporation.-worldwide
corporation-jobs but may influence
culture. Walt Disney fits both categories
so does Coca-Cola.
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Types of Businesses
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Sole Proprietorships: Business owned by a
single person or a married couple. 75% of
businesses in the US are proprietorships.
◦ Advantages: full control, sole receiver of
profits, easy to start.
◦ Disadvantages: limited access to physical
capital, unlimited liability= must pay for all
of the firm’s losses.
Partnerships: Two or more owners
Advantages: Owners share the income
and losses.
 Disadvantages: limited liability-both
partners share in liability.
 In a limited partnership one partner may
bear the brunt of losses. In equal
partnership both bear equally.
 Advantage: Shared decision making,
specialization and larger pool of capital.

Corporation: Several people come
together and pool resources to
form a corporation.
Advantage: The company is one entity: the
company is the one that bears the liability.
 Corporations act as individuals
 Disadvantage: owner has no control:
Decisions are based on Board of
Directors, CEO and others who make up
corporate board.
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1. Owners receive stock in return for investment
in company. Each share of ownership is
interest in the company.
2. The stock holder receives one share on income
paid out by the corporation or a dividend.
3. Corporations also raise capital by selling bonds
or money the firm owes to people who lend it
money.
4. Both stocks and bonds can be bought and sold
in the stock markets.
5. The decisions made in the company on long
term goals for the corporation are made by the
Board of Directors. They hire a CEO, and
President to run day to day operations of the
business.
Franchise
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Franchises are not a form of business but
a license to operate as another business.
The owner of a franchise has partial
ownership but so does the parent
company.
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What is financial capital?