Download Market Structures Notes

Market Structures
Competition
Pure
Competition
Monopolistic
Competition
Oligopoly
Monopoly
• Markets range from very competitive with many
consumers and producers to very limited with only
one buyer or supplier
• Market Structure Video
Take a moment and try to categorize the
following…what common traits do they
share? Differences?
• Capitalism - maximize efficiency by protecting competition
– Indiv own FOP - decisions based on max. rewards (Profit)
– Usually => more efficient use of FoP’s
•Don’t allow monopolies (unfair power or trade)
– Capitalism game
*Rewards those who use resources efficiently => max
profit
•Profit - what is left after costs are met
*Those who are inefficient => lose (go out of bus.)
– Incentive of Capitalism is to Maximize Profits
– Types of Capitalism include…
– Pure Competition –purely hypothetical system
– Assumes: Laissez-Faire Gov’t w/ many small businesses making exactly the
same product (no variations in any way) in exactly the same way and
consumers have perfect knowledge of all prices (so they can decide based
only on price), Business operate at “Normal Profit (Costs +a little profit,
just barely able to survive)
• No gov’t involvement other the to protect the nation
• Many very small producers
• Produce a homogeneous product – exactly the same
• Since there are many alternatives can’t compete on Price – already is at
“Normal Profit” – able to pay your bills with a very small profit
• Consumers have perfect knowledge of all prices – allows them to ‘Vote
by Feet” - switch if there is a lower alternative
• No Barriers to Entry – few rules, little start up costs
• If someone can produce cheaper, that advantage is only temporary since
everyone knows everything => people shift production and consumption
very quickly
• Pure Market or Perfect Competition Market producers are
“Price Takers” –
*Can’t control the price – if they raise prices - consumers won’t
buy (perfect knowledge) – if they drop prices they go out of
business (Normal Profit)
• No real incentives to compete since everything is homogeneous
• Not the real world – allows us to look at how markets function
• The internet is coming close – allows us to compare prices around the
world (as long as prices are on the net)
– Guarantees lowest prices and best quality
– Not perfect knowledge
• While it is hypothetical – It allows you to examine Markets w/o some of
the externalities of incentives
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Real World Capitalism –
Has several different types
Depends on government and number of sellers
Monopolistic Competition
*Has monopolistic power – some control over prices but not
total control
*Some government controls – labor laws, minimum wages,
OSHA, price ceilings
*Not exactly homogeneous Product – allows some ability to
differentiate between product – Color, style materials
*Many suppliers but not too many – offers many options
*Consumers do NOT have perfect information on price and style
*Does not Guarantee the lowest cost of Best price but is mostly
efficient
– Competition => “Price Takers” but not completely
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Other Market types limit the number of producers (Sellers)
Just a Few producers – limits the am’t of competition
Oligopoly – Just a Few sellers
Usually control a very limited resource – oil, gas, precious metals
To guarantee competition => often act together to force out competition
Collusion –companies acting together..usually illegally
Often called a Cartel –
Group of businesses operating together to control price by limiting supply
– OPEC, DeBeers (Diamonds), Drugs
• Control distribution and sales
• Price Setters, but not completely
• Must compete with others in the cartel
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One Seller – Monopoly
Price Setters
Complete control over Market – no competitors
Least efficient, highest prices…
Type of
Economy
Perfect
Competition
Ease of
Number of
Starting a
Competitors
new Business
(Sellers)
Easy - No
Barriers to
new
Type of
Number of
Goods
Buyers
produced
Same -
Many
Homogeneous
Many
companies
Monopolistic
Competition
Few if
any
Many
similar
Many
Oligopoly
Some
Few
Homogeneous
Many
Monopoly
Many
None
Homogeneous
Many