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PERFECT
COMPETITION
7.1
Objectives
1.
2.
3.
Describe the four conditions that are in
place in a perfectly competitive market.
List two common barriers that prevent
firms from entering a market.
Describe prices and output in a perfectly
competitive market.
Perfect Competition- a market structure in which a large number of
firms all produce the same product.
Four Conditions for Perfect
Competition
I.
A.
Many Buyers and Sellers
B. Identical Products- there are no
differences between the products
sold by different suppliers
i.
Commodity- a product that is the same
no matter who produces it, such as
petroleum, notebook paper, or milk
C. Informed Buyers and Sellers- know
enough about the market to find the
best deal
D. Free Market Entry and Exit
i.
Firms must be able to enter markets
when they will make money and exit
them when they will lose money
II. Barriers to Entry
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
B. Technology
A.
i.
Some markets require a high degree of
technological know how
III. Price and Output
A.
Efficiency is the primary
characteristic of perfect competition
i.
ii.
Prices correctly represent the
opportunity cost of the product
Prices are the lowest sustainable price
possible
MONOPOLY
Objectives
1.
2.
3.
Describe characteristics and give
examples of monopoly.
Describe how monopolies are formed,
including government monopolies.
Explain how a firm with a monopoly sets
output and price, and why companies
practice price discrimination.
Monopoly- a market dominated by a
single seller
II. Forming a Monopoly
I.
A.
Economies of Scale- factors that cause a
producer’s average cost per unit to fall as
output rises
Limited economies of scale- output will
eventually rise as production rises
ii. An industry that enjoys economies of scale
can easily become a natural monopoly
i.
B. Natural Monopolies- a market that runs most
efficiently when one large firm supplies all of
the output
i.
Utilities
C. Technology and Change
i.
Technology can cut fixed costs and make
small companies as efficient as one large
firm
III. Government Monopolies
A.
Patents- license that gives the inventor of a
new product the exclusive right to sell it for a
certain period of time
B. Franchises and Licenses
i.
ii.
Franchise- the right to sell a good or
service within an exclusive market
License- a govt issued right to operate a
business
C. Industrial Organizations
i.
The govt allows MLB and other sports
organizations to restrict entry of teams
IV. Output Decisions
A.
The Monopoly’s Dilemma
i. Monopoly still limited by the demand curve
for the product
B.Falling Marginal Revenue
i. Marginal revenue is lower than the price
when the firm can control the price and
cut it to sell more
V. Price Discrimination
A.Market power- the ability of a company to
change prices and output like a monopolist
C. Targeted Discounts- Companies divide
consumers into large groups and design
pricing policies for each group
i.
ii.
iii.
Rebates
Senior citizen and students
Free for children
D. Limits of Price Discrimination
A.
B.
C.
Some market power
Distinct customer groups
Difficult resale
Monopolistic Competition
Objectives
1.
2.
3.
4.
Describe characteristics and give
examples of monopolistic competition.
Explain how firms compete without
lowering prices.
Understand how firms in a
monopolistically competitive market set
output.
Describe characteristics and give
examples of oligopoly.
Monopolistic Competition
I.
a market structure in which many companies
sell products that are similar but not
identical.
A.
i.
Examples: gas station, retail store
II. Four Conditions of Monopolistic
Competition
Many Firms- w/ a small investment, firms can
begin to sell a product
Few artificial Barriers to entry
Slight Control over price
Differentiated Products
A.
B.
C.
D.
i.
differentiation
III. Nonprice Competition- A way to attract
customers through style, service, or
location, but not a lower price
A. Physical Characteristics
B. Location- some goods can be differentiated by
where they are sold
C. Service Level- higher prices can be charged if a
firm offers a high level of service
D. Advertising, image, or status
i. Advertising creates more of a perceived difference
rather than a real one
IV. Price, Output, and Profits
A.
B.
Prices and output will be higher than in
perfectly comp. markets but lower than
monopolies
Profit is kept down by competition w/ other
firms and the ease of entry into the market
V. Oligopoly- a market structure in which a
few large firms dominate the market
A.
Barriers to Entry
B. Cooperation and Collusion
i.
ii.
Price Leadership- w/o actually ‘cooperating’ to raise
prices, firms will make it well known that they are
going to raise prices and hope that others do as well
Collusion- an agreement among firms to divide the
market, set prices, or limit production
1. Price fixing- agreement to charge one price for the
same good
C. Cartels- a formal organization of producers
that agree to coordinate prices and production