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Transcript
Chapter Chapter 7 • Section 1 Perfect Competition Preview Objectives Section Focus Key Terms Perfect Competition After studying this section you will be able to: Perfect competition exists when a market has many buyers and sellers of the same good. Few markets are perfectly competitive because barriers keep companies from entering or leaving the market easily. perfect competition commodity barrier to entry imperfect competition start-up costs Objectives You may wish to call students’ attention to the objectives in the Section Preview. The objectives are reflected in the main headings of the section. 1. Describe the four conditions that are in place in a perfectly competitive market. 2. List two common barriers that prevent firms from entering a market. 3. Describe prices and output in a perfectly competitive market. he simplest market structure is known as perfect competition. It is also called pure competition. A perfectly competitive market is one with a large number of firms all producing essentially the same product. Pure competition assumes that the market is in equilibrium and that all firms sell the same product for the same price. However, each firm produces so little of the product compared to the total supply that no single firm can hope to influence prices. The only decision such producers can make is how much to produce, given their production costs and the market price. T Four Conditions for Perfect Competition Many Buyers and Sellers Perfectly competitive markets require many participants on both the buying and the selling sides. No individual can be powerful enough to buy or sell enough goods to influence the total market quantity or the market price. Everyone in the market must accept the market price as given. As we saw in Chapter 6, supply and demand interact to determine both price and output. If a market has many independent buyers and sellers, it is not very likely that large enough groups of either buyers or sellers will work together to bargain for better prices. Instead, the market determines price without any influence from individual suppliers or consumers. perfect competition a market structure in which a large number of firms all produce the same product Vocabulary Builder Have students The market for tomatoes comes close to perfect competition because a large number of firms sell tomatoes, and one tomato is very much like another. While very few industries meet all of the conditions for perfect competition, some come close. Examples include the markets for many farm products and the stocks traded on the New York Stock Exchange. Both of these examples fulfill four strict requirements for a perfectly competitive market: 1. Many buyers and sellers participate in the market. 2. Sellers offer identical products. 3. Buyers and sellers are well informed about products. 4. Sellers are able to enter and exit the market freely. BU Chapter 7 ■ Section 1 I L D I NG 151 K S Graphing the Main Idea EY C ON CE P T Competition To build understanding of the concept of competition, have students use a tree map graphic organizer like the one below to record details about the factors needed to meet the conditions for perfect competition. Remind students that a tree map shows a main topic, main ideas, and supporting details. Bellringer Display the word competition. Ask students to describe how they face competition in their daily lives. Then ask them how competition applies to economics. Explain that in this section they will learn about competition in business and about the four conditions that must be met for perfect competition to exist in the market. Section Reading Support Transparencies A template and the answers for this graphic organizer can be found in Chapter 7, Section 1 of the Section Reading Support Transparency System. create index flash cards for the five key terms. Remind them to put a term on one side of each card and the term’s definition on the other. Lesson Plan Teaching the Main Concepts L3 1. Focus Explain that this section discusses a perfectly competitive market structure, in which many businesses compete. Ask students to think of items that are produced by many competing businesses. 2. Instruct Stress to students that barriers to entry do not exist in a perfectly competitive market. Have students identify barriers to entry that are not described in the section. Remind students that a perfectly competitive market fulfills the four requirements listed in the text. 3. Close/Reteach Have students choose a product that they use regularly. Then ask them to try to determine how close the industry that manufactures their product comes to a perfectly competitive market. Have students create charts that display their findings. Guided Reading and Review Unit 2 folder, p. 35 asks students to identify the main ideas of the section and to define or identify key terms. 151 Chapter Chapter 7 • Section 1 A pushcart L2 Display a basic outline of the section, using the section headings. Explain to students that using headings is a helpful outlining strategy for many informational texts. Organize students into three groups, and have each group read a different part of the section. Ask members of each group to fill in their part of the outline. Then have students copy the entire outline on a piece of paper. ELL business is easy and inexpensive to begin, while a steel mill requires a large building and costly machinery. L3 Have students create a poster about perfect competition. Instruct them first to choose a market that comes close to perfect competition. The poster should list and illustrate the four conditions for perfect competition with drawings, cartoons, or pictures from newspapers or magazines. Display the posters in the classroom. commodity a product that is the same no matter who produces it, such as petroleum, notebook paper, or milk Transparency Resource Package Economics Concepts, 7A: Perfect Competition Identical Products In a perfectly competitive market, there are no differences between the products sold by different suppliers. This is the second condition for perfect competition. If a rancher needs to buy corn to feed his cattle, he will not care which farmer grew the corn, as long as every farm is willing to deliver the corn he needs for the same price. If an investor buys a share of a company’s stock, she will not care which particular share she is buying. A product that is considered the same regardless of who makes or sells it is called a commodity. Examples of commodities include low-grade gasoline, notebook paper, and milk. Identical products are key to perfect competition for one reason: the buyer will not pay extra for one particular Global Connection Informed Buyers and Sellers The third condition for a perfectly competitive market is that buyers and sellers know enough about the market to find the best deal they can get. Under conditions of perfect competition, the market provides the buyer with full information about the features of the product and its price. For the market to work effectively, both buyers and sellers have clear incentives to gather as much information as possible. In most markets, a buyer’s willingness to find information about prices and availability represents a trade-off. The time spent gathering information must be worth the amount of money that will be saved. For example, most buyers would not search the Internet or visit a dozen convenience stores to save five cents on a pack of chewing gum. Informed Buyers The French government ensures that travelers will Free Market Entry and Exit have complete information about the market for hotel rooms and restaurant meals. While hotels in the United States usually advertise only special discounts, every hotel in France must post in its lobby a list of rates for single and double rooms, with and without a sink, shower, or full bathroom. Restaurants must go further and post a long list of prices for dozens of items, leaving spaces blank if some common items are not on the menu. The final condition of perfectly competitive markets is that firms must be able to enter them when they can make money and leave them when they can’t earn enough to stay in business. For example, when the first pioneering companies began earning a lot of money selling frozen dinners, several competitors jumped into the market with $ Econ 101: Key Concepts Made Easy Competition A key concept in this section is perfect competition. A perfectly competitive market has a very large number of firms, each producing identical products, and each accepting the market price as given. Help students understand that an example of a perfectly competitive market is the market 152 company’s goods. The buyer will always choose the supplier with the lowest price. created by stocks traded on the New York Stock Exchange. There are a large number of participants. Each acts as a tiny part of the market. No one participant is powerful enough to influence the total market quantity or the price of goods. Chapter Chapter 7 their own products. Later, the firms withdrew from the market those dinners that consumers didn’t buy. Studies show that markets with more firms, and thus more competition, have lower prices. When one firm can keep others out of the market, it can sell its product at a higher price. Barriers to Entry Factors that make it difficult for new firms to enter a market are called barriers to entry. Barriers to entry can lead to imperfect competition. Common barriers to entry include start-up costs and technology. flowers, cookies, or candy. Some technically skilled students could offer to fix cars or bicycles. Very few student groups would be able to create and sell a new wordprocessing program. Some markets require a high degree of technological know-how. A carpenter, pharmacist, or electrician can spend years in training before he or she has learned all the important skills. As a result, new entrepreneurs cannot easily enter these markets without a lot of preparation and study. Barriers of technology and know-how can keep a market from becoming perfectly competitive. barrier to entry any factor that makes it difficult for a new firm to enter a market imperfect competition a market structure that does not meet the conditions of perfect competition start-up costs the expenses a firm must pay before it can begin to produce and sell goods Price and Output Start-Up Costs Entrepreneurs need to invest money in a new firm long before they can start earning income. Before a new sandwich shop can open, the owner needs to rent a store, buy a refrigerator, freezer, and oven, and print menus. The expenses that a new business must pay before the first product reaches the customer are called start-up costs. When the start-up costs in a market are high, entrepreneurs are less likely to enter that market. As a result, markets that involve high start-up costs are less likely to be perfectly competitive markets. For example, the costs of starting up a sandwich shop are much lower than those involved in starting up a lumber mill or a giant supermarket. So, an entrepreneur with a small income is much more likely to try her luck with a sandwich shop. Use of the Internet reduced start-up costs in many markets, including books and music. However, many entrepreneurs discovered that a Web page did not attract and hold customers as easily as a shop window. The high costs of advertising, shipping, and discounting goods pushed many out of business. With a few exceptions, the Internet-based companies that have succeeded paid substantial start-up costs. One of the primary characteristics of perfectly competitive markets is that they are efficient. Competition within these markets keeps both prices and production costs low. Firms must use all inputs—land, Figure 7.1 Perfect Competition Number of firms: Many • Section 1 L3 To help students understand the difficulties of starting a high-tech business, have them write a paragraph in which they explain what barriers to entry might exist in starting a computer repair service. Encourage students to include specific reasons in their explanations. Meeting NCEE Standards Use the following benchmark activity from the Voluntary National Content Standards in Economics to evaluate student understanding of Standard 9. Explain why, in the last 10 years, there have been no U.S. companies emerging to manufacture locomotives, but many emerging to manufacture silk-screen T-shirts and sports clothing. Also, predict what happened to prices of resold tickets to sporting events after Arizona required all ticket scalpers to operate only in a small roped-off area near the stadium or arena in the two hours before an event. Variety of goods: None Transparency Resource Package Economics Concepts, 7B: Barriers to Entry Barriers to entry: None Technology When a school group needs to raise money, its members could sell goods like Control over prices: None L3 (Reteaching) Have students write one or two paragraphs explaining the following statement: One of the primary characteristics of perfectly competitive markets is that they are efficient in terms of both price and output. A perfectly competitive market must include a large number of suppliers selling the same good. Competition What prevents any one firm from raising its prices? Block Scheduling Strategies Consider these suggestions to take advantage of extended class time: ■ Extend the Bellringer activity on p. 151 by holding an informal debate on whether competition has positive or negative effects on the economy. Allow students to choose a position, and have teams face each other. Each student may make a statement without being interrupted, and students may switch to the other side as points are made. ■ Show the Economics Video Library segment “Down on the Farm,” about the struggles of small farmers. After viewing the segment, hold a discussion on the way perfect competition affects family farms. ■ Invite an entrepreneur to speak about barriers to entry in his or her business. Then ask students to write on how barriers to entry could be minimized. Answer to . . . Building Key Concepts If one firm raised its prices, people would stop buying its products, since other identical products would be cheaper. The company would eventually go out of business. 153 Chapter Chapter 7 • Section 1 Figure 7.2 Market Equilibrium in Perfect Competition GTE Presentation Pro CD-ROM Quiz provides multiple-choice questions to check students’ understanding of Section 1 content. Answers to . . . Section 1 Assessment 1. Characteristics include: many buyers and sellers participate in the market (farmers market); sellers offer identical products (oranges, shoes); informed buyers and sellers (car dealerships, computers); and ability for sellers to enter or exit the market freely (restaurants, consultant services). 2. High start-up costs discourage new ventures by creating the potential for large losses. Many people are unwilling to take the risk of starting a new business. 3. Student responses will vary, but examples may include start-up costs such as office space and word processing equipment. 4. Perfectly competitive markets require identical products, and commodities are defined as identical products. 5. b, f, g 6. Examples of expenses are store rental, inventory costs, employee salaries, and advertising. Final student estimates should be sound and based on tangible information that they have gathered from various sources. 7. Answers will vary but should demonstrate ability to identify barriers to entry based on knowledge gained from this section. Possible answers may include patent regulations or restriction of the number of firms in the market by an industrial association. Equilibrium Price Equilibrium Quantity Quiz Unit 2 folder, p. 36 includes questions to check students’ understanding of Section 1 content. Supply In a perfectly competitive market, price and output reach their equilibrium levels. Competition What factors allow a perfectly competitive market to reach equilibrium? Price Guide to the Essentials Chapter 7, Section 1, p. 28 provides support for students who need additional review of the section content. Spanish support is available in the Spanish edition of the guide on p. 28. Demand Quantity labor, organizational skills, machinery and equipment—to their best advantage. As a result, the prices that consumers pay and the revenue that suppliers receive accurately reflect how much the market values the resources that have gone into the product. In a perfectly competitive market, prices correctly represent the opportunity costs of each product. Section 1 Assessment Key Terms and Main Ideas 1. Describe characteristics and give examples of perfect competition (pure competition). 2. How do start-up costs discourage entrepreneurs from entering a market? 3. What are two examples of barriers to entry in the magazine market? 4. Why must perfectly competitive markets always deal in commodities? Prices in a perfectly competitive market are the lowest sustainable prices possible. Because many sellers compete to offer their commodities to buyers, intense competition forces prices down to the point where the prices just cover the mostefficient sellers’ costs of doing business. As you read in Chapter 6, this equilibrium is usually the most efficient state a market can achieve. We saw in Chapter 5 that producers earn their highest profits when they produce enough that their cost to produce one more unit exactly equals the market price of the unit. Since no supplier can influence prices in perfectly competitive markets, producers will make their output decisions based on their most efficient use of available land, labor, capital, and management skills. In the long run, output will reach the point where each supplying firm just covers all of its costs, including paying the firm’s owners enough to make the business worthwhile. Progress Monitoring Online For: Self-quiz with vocabulary practice Web Code: mna-2075 6. Try This Suppose that you and your friends plan to open a new convenience store. Brainstorm a list of ten expenses that would be your start-up costs. Next, use the Sunday newspapers and the Internet to estimate how much each item on your list will cost. How much do you estimate you will spend before the store can open? 7. Critical Thinking Other than technology and start-up costs, what are two specific examples of barriers that could prevent a company or individual from entering a market? Applying Economic Concepts PHSchool.com 5. Decision Making Which of these markets come close to perfect competition? (a) televisions (b) bottled water (c) pizza (d) school buses (e) white socks (f) baseballs (g) paper clips For: Simulation Activity Visit: PHSchool.com Web Code: mnd-2071 Progress Monitoring Online For additional assessment, have students access Progress Monitoring Online at Web Code: mna2075 Answer to . . . Building Key Concepts Students may mention the presence of many buyers and sellers, identical products, informed buyers/sellers, and a market that can be entered and exited freely. 154 Typing in the Web Code when prompted will bring students directly to detailed instructions for this activity.