Download Unit 3 Teacher

Unit 3 – Market Structure
Ch7
-“MARKETPLACE” Selling and buying takes place in a market, which is not a physical place, but instead
refers to the entire activity of buying and selling that takes place out in the world.
 Marketplace an Infrastructure for a free exchange of goods & services.
 Consumers & producers both benefit from competition in the marketplace.
 Supply and demand determine what is produced, at what prices & promote competition.
 A market structure is an economic model that allows economists to examine competition among
businesses in the same industry. The type of market structure influences how a firm behaves:
Pricing, Supply, Barriers to Entry, Efficiency and Competition.
-Barriers to entry It is any factors which make it difficult for new firms to enter the market:
- Start up costs, Technology needs and Patents & licenses
 These “BARRIERS TO ENTRY” can hurt or help companies to gain a position in the Market.
- Four Types of Market Structures1. PERFECT COMPETITION
2. MONOPOLISTIC COMPETITION
3. OLIGOPOLY
4. MONOPOLY
1) Perfect Competition:
Many firms{businesses} produce the same product
 Buyers & sellers compete directly under the laws of Supply and Demand.
 No one seller or buyer has control over price - able to keep costs low.
 Buyers and sellers are free to enter and exit the market.
 No government regulations or other restrictions prevent a business or customer from participating in
the market.
 Both buyers and sellers are well-informed about market conditions; Buyers can do comparison
shopping.
 In the real world, there are no perfectly competitive markets because real markets do not have all of
the characteristics of perfect competition
2) Monopolistic Competition:
Many firms sell products that are similar but not identical.
 Seller has influence over a small segment of the market with products that are not exactly like those
of their competitors. Example: Phones or T-shirts printed with images or slogans.
 Engage in Product Differentiation - Emphasize differences in product from similar products.
 Engage in Non-price Competition - using factors other than low price—such as style, service,
advertising, or giveaways—to try to convince customers to buy one product rather than another.
 Few artificial “barriers to entry.
3) Oligopoly:
A market dominated by a few large firms -(between 3 & 5)
 A few large firms have a large market share{percent of total sales in a market} and dominate the
market. Examples: Movies are made by one of just a few major studios or Cereals.
 Similar priced products.
 Engage in non-price competition, so it encourages brand loyalty.
 There are few firms because of high start-up cost {the expenses} that a new business must pay to
enter a market.
 Significant barriers to entry.
 About half of the manufacturing industries in the United States are oligopolistic.
Monopoly
4) Monopoly:
A single seller controls the market through resources, production, & pricing.
 The least competitive market
 The producer is the market provider with no close substitutes.
 Monopolies cannot charge whatever price they want, because of Demand.
 Significant barriers to entry.
 Not all monopolies are illegal.
- FOUR TYPES OF MONOPOLIES:
1. Natural
2. Geographic
3. Government
4. Technological
 All are Regulated by the government
1) Natural Monopolies:
 A single seller provides a good or service most efficiently.
 Governments give exclusive rights, but regulate the services & prices.
 Most public utilities fall into this category
2) Geographic Monopolies:
 A monopoly that exists because there are no other producers or sellers within a certain region.
Ex: general store, gas station, business on military base, Pro Sport Teams
3) Government Monopolies:
 The government is the sole provider of the good/service.
 Provided to enhance the “general welfare”.
Ex: military, police, fire departments
4) Technological Monopolies:
 A company has developed new technology to create new or improve existing products
 Companies protect themselves by filing patents or copyrights.
 A patent is a legal registration of an invention or a process that gives the inventor
the exclusive rights.
EX: pharmaceutical companies, Microsoft
-In a Free-Market, monopolies are illegal Federal laws keep firms from controlling price & distribution of essential goods.
 When businesses take steps that counteract the effects of competition, prices go up and supplies
go down. The FTC and the Department of Justice enforce these laws.
 Historically, some companies dominated industries by practicing price fixing & intimidation tactics
to eliminate competition.
 These companies grew extremely powerful & were known as TRUSTS: illegal grouping of
companies which discourage competition.
 Trusts were primarily in the oil, tobacco, railroads, and steel industries.
-Anti-Trust Legislation The SHERMAN ACT OF 1890: began anti-trust legislation which outlawed mergers & monopolies
which limit trade between states.
 The FEDERAL TRADE COMMISSION ACT OF 1914: created the Federal Trade Commission
which enforces anti-trust laws.
 Deregulation - reducing or removing government oversight and control of business.
 In the 1970s & 80s, the Federal government deregulated major industries in banking, railroad,
airline, (among others) which opened competition. The results of deregulation have been mixed.
Business Organizations
Ch8
-
- Business Organizations is an enterprise that produces goods or provides services in a Marketplace.
TYPES:
1. Sole proprietorship
2. Partnership
3. Corporation
-Plant, Firm, Industry Plant - the physical location where production takes place
 Firm - the company/business
 Industry - a number of firms in the same type of business
1) Sole Proprietorship:
 A small business owned & managed by an individual.
 The most common type of business in the US.
 About 70% of all firms are sole proprietorships.
 Generate about 5% of all sales in the US.
 Almost 70% percent of sole proprietorships make less than $25,000 in sales during the year.
 Such small businesses are usually run part time out of the owners’ homes.
-Advantages of sole-proprietorship:
(+) Easy to start up
- must obtain a local business license register business name with the state.
(fictitious name affidavit)
(+) Few regulations
- although certain areas have business zoning laws &/or health codes
(+) Owner keeps profits
- after costs of production are paid, remaining revenue is income.
(+) Owner control
- allows for freedom & flexibility to respond to market changes.
(+) Easy to discontinue
- Stop when you want to.
-Disadvantages of sole-proprietorship:
(-) Unlimited liability for debt
- the owner is personally responsible for the expenses & debts incurred by the business.
(liability means your legal responsibility)
(-) Limited access to resources
- may have to use personal savings for initial investment to obtain equipment and inventory.
(-) limited growth potential
- growth of the business depends on the skills & abilities of the owner
(-) lack of longevity
- the business will exist as long as the owner has interest most sole-proprietorships close within
the first 3 years of business.
Partnership and Corporations
Ch8
2) Partnership:
 Partnership - a business owned by 2 or more people who share in profits & responsibilities
 About 7% of all businesses in the America are partnerships.
 Partnerships generate about 5% of all sales & 10% of all income.
 Majority of partnerships are quite small, making less than $25,000 in sales during a year.
-3 types of partnerships General partnership: partners share equally in all business responsibilities, debts and losses,
even if another partner caused the debt.
 Limited partnership: at least one partner is not involved in the day-to-day running
of business and is liable only for the funds he or she has invested.
 Limited Liability Partnership (LLP): all partners are limited partners and not responsible for the
debts and other liabilities of other partners. If one partner makes a mistake that ends up costing
the business a lot of money, the other partners cannot be held liable.
 Not all businesses can register as LLPs. Those that can include medical partnerships, law firms,
and accounting firms. Laws governing them vary from state to state.
-Advantages of partnerships:
(+) Easy to start
- local business licenses are required.
- written partnership agreements outlining each partner’s Responsibilities.
- depending on the type of business, partnership may have few regulations.
(+) Shared decision making and specialization of tasks:
- An individual does not have sole burden for all business decisions.
- Partners are able to concentrate on their strengths to run the business.
(+ ) Larger pool of capital
- Each partner’s assets add to the firm’s value and ability to borrow money.
Assets are money & valuables belonging to an individual or business.
(+) Taxes
- individuals pay taxes on their income- lowering the business expenses.
-Disadvantages of partnerships(-) Unlimited liability - except in the case of a limited partnership, all partners are responsible for
business debt.
(-) Potential for conflict - partnership agreements address managerial aspects of the business, not
personal philosophies.
3) Corporation:
 Business owned by individuals, called shareholders or stockholders. The shareholders own the rights
to the company’s profits, but they face limited liability for the company’s debts and losses.
 20% of all business are corporations.
 90% of all sales are through corporations.
 Gain ownership rights through the purchase of stock, or shares in the corporation.
 The corporation can make contracts, hire workers, pay taxes, & enter into legal proceedings.
-Types of Corporations Privately held corporations : issue stock to a limited number of people, mainly family members- do
not “trade” stocks on the market.
 Publicly held corporation: will issue stock which is bought & sold on the stock market to the public.
 Initial Public Offering – IPO’s are the first sale of stock by a private company to the public.
Ch8
Corporate Mergers and Conglomerate
(+)-Advantages of Corporations(+) Limited liability to stockholders
- Individual investors are not held responsible for the actions of the corporation.
(+) Separation of ownership & management
- “Professionals” are hired to run the day to day operations of the business.
(+) Higher growth potential
- Sell Stocks or bond to raise funds to expand. It’s easier to borrow money from banks
(+) Longevity
- the business continues after death of the owners & stock is transferable.
-Disadvantages of Corporations(-) risk the value of your stock might decline
(-) Expensive & Complex to start up
(-) Corporate taxes:
- being a legal entity, corporations pay taxes.
- stockholders who receive dividends pay additional taxes.
- stockholders who earn capital gains on the sale of their stock also pay additional taxes.
 Dividends is the profit that the company pays out to stockholders.
 Capital Gains is the difference between what you paid for the stock and sold it at.
(-) Loss of control
- owners (stockholders) do not have a say in day to day operations or direction of corporate
actions.
(-) Regulation
- corporations are subject to many government regulations.
-Corporate Mergers Some corporations get to the point where they plan to grow through a merger: a combining of 2 or
more companies into a single firm.
 Horizontal Mergers The joining of 2 or more companies in the same market & provide the same good or service.
 -Vertical Mergers Two or more firms involved in different stages of production of the same good or service combine
into one.
-Conglomerate A conglomerate is a corporation that is made up of a number of different, seemingly unrelated
businesses.
 It is a result from a merger of companies - one company owns a controlling stake in a number of
smaller companies, which produce unrelated goods or services.
 The firms are not in competition with each other.
 It does not lead to decreased competition, so this type of merger is usually allowed.
-Franchise vs. Subsidiary Umbrella Corporations: businesses which operate under a larger “parent” company.
 Franchise: pays fees to a parent company in return for the right to sell their product in an area.
 Subsidiary: a business owned by another larger corporation which has controlling interest.
 The Better Business Bureau, a nonprofit organization sponsored by local businesses to provide
general information on companies.
A Short History of Financial Deregulation in the United States
 1996, Fed Reinterprets Glass-Steagall – Federal Reserve reinterprets the Glass-Steagall Act several
times, eventually allowing bank holding companies to earn up to 25 percent of their revenues in
investment banking.
 1998, Citicorp-Travelers Merger – Citigroup, Inc. merges a commercial bank with an insurance
company that owns an investment bank to form the world’s largest financial services company.
 1999, Gramm-Leach-Bliley Act – With support from Fed Chairman Greenspan, Treasury Secretary
Rubin and his successor Lawrence Summers, the bill repeals the Glass-Steagall Act completely.
 2000, Commodity Futures Modernization Act – Passed with support from the Clinton Administration,
including Treasury Secretary Lawrence Summers, and bi-partisan support in Congress. The bill
prevented the Commodity Futures Trading Commission from regulating most over-the-counter
derivative contracts, including credit default swaps.
 2004, Voluntary Regulation – The SEC proposes a system of voluntary regulation under the
Consolidated Supervised Entities program, allowing investment banks to hold less capital in reserve
and increase leverage.
 2007, Subprime Mortgage Crisis – Defaults on subprime loans send shockwaves throughout the
secondary mortgage market and the entire financial system.
 December 2007, Term Auction Facility – Special liquidity facility of the Federal Reserve lends to
depository institutions. Unlike lending through the discount window, there is no public disclosure on
loans made through this facility.
 March 2008, Bear Stearns Collapse – The investment bank is sold to JP Morgan Chase with
assistance from the Federal Reserve.
 March 2008, Primary Dealer Facilities – Special lending facilities open the discount window to
investment banks, accepting a broad range of asset-backed securities as collateral.
 July 2008, Housing and Economic Recovery Act – Provides guarantees on new mortgages to
subprime borrowers and authorizes a new federal agency, the FHFA, which eventually places Fannie
Mae and Freddie Mac into conservatorship.
 September 2008, Lehman Brothers Collapse – Investment bank files for Chapter 11 bankruptcy.
 October 2008, Emergency Economic Stabilization Act – Bill authorizes the Treasury to establish the
Troubled Asset Relief Program to purchase distressed mortgage-backed securities and inject capital
into the nation’s banking system. Also increases deposit insurance from $100,000 to $250,000.
 Late 2008, Money Market Liquidity Facilities – Federal Reserve facilities created to facilitate the
purchase of various money market instruments.
 March 2009, Public-Private Investment Program – Treasury Secretary Timothy Geithner introduces
his plan to subsidize the purchase of toxic assets with government guarantees.