Chapter 4 (?

)
Market systems
 PERFECT competition
Perfect competition is a
market structure in which a
large number of firms all
produce the same product.

In order for perfect

competition to occur, four
conditions must be met...
 It’s Conditional
1. Many Buyers and Sellers
There are many participants on both
the buying and selling sides.

2. Identical Products
There are no differences between
the products sold by different suppliers.

3. Informed Buyers and Sellers

The market provides the buyer with
full information about the product and its
price.

4. Free Market Entry and Exit

Firms can enter the market when
they can make money and leave it when
they can’t. They are not forced to stay or
 Barriers to entry
There are certain factors that make it difficult
for new firms to enter the market. These factors
are called Barriers to entry. There are two
major barriers to entry:

Start-up Costs
The expenses that a new business must pay
before the first product reaches the customer
are called start-up costs.

Technology
Some markets require a high degree of
technological know-how. As a result, new
entrepreneurs cannot easily enter these
markets.
Price and Output
One of the primary
characteristics of perfectly Market Equilibrium in Perfect Competition

competitive markets is that

they are efficient. In a Supply

perfectly competitive

Price
market, price and output Equilibrium
Price

reach their equilibrium

Equilibrium
Quantity
levels. Demand

Quantity
 Section 1 Questions
1. Which of the following is NOT a condition for perfect competition?
(a) many buyers and sellers participate
(b) identical products are offered
(c) market barriers are in place
(d) buyers and sellers are well-informed about goods and services
2. How does a perfect market influence output?
(a) Each firm adjusts its output so that it just covers all of its costs.
(b) Each firm makes its output as large as possible even though some goods are
not sold.
(c) Different firms make different amounts of goods, but some make a profit
and others do not.
(d) Different firms each strive to make more goods to capture more of the
market.
Section 2
MONOPOLIES
 What is a
monopoly ?
A monopoly is a market dominated by a
single seller.

Monopolies form when barriers prevent

firms from entering a market that has a
single supplier.

Monopolies can take advantage of their

monopoly power and charge high
prices.
 There are different
types?
Different market conditions can create different types of
monopolies.
1. Economies of Scale
If a firm's start-up costs are high, and
its average costs fall for each additional unit it
produces, then it enjoys what economists call
economies of scale. An industry that enjoys
economies of scale can easily become a natural
monopoly.
2. Natural Monopolies
A natural monopoly is a market that
runs most efficiently when one large firm
provides all of the output.
3. Technology and Change
Sometimes the development of a new
technology can destroy a natural monopoly.
Government Monopolies
A government monopoly is a monopoly created by the
government... Shocker.

Technological Monopolies
The government grants patents, licenses
that give the inventor of a new product the
exclusive right to sell it for a certain period
of time.
Franchises and Licenses
A franchise is a contract that gives a single
firm the right to sell its goods within an
exclusive market. A license is a
government-issued right to operate a
business.
Industrial Organizations
In rare cases, such as sports leagues, the
government allows companies in an
industry to restrict the number of firms in
the market.
 Price Discrimination
Price discrimination is the division of customers
into groups based on how much they will pay
for a good.

Although price discrimination is a feature of

monopoly, it can be practiced by any company
with market power. Market power is the ability
to control prices and total market output.

Targeted discounts, like student discounts and

manufacturers’ rebate offers, are one form of
price discrimination.
Price discrimination requires some market
power, distinct customer groups, and difficult
resale.
 A monopolist sets output at a
Output Decisions point where marginal revenue is
equal to marginal cost.
Even a monopolist faces a limited choice
– it can choose to set either output or Setting a Price in a Monopoly

price, but not both.

Market Marginal
Price $11 Cost
Monopolists will try to maximize profits;
B

therefore, compared with a perfectly

competitive market, the monopolist C

Price
produces fewer goods at a higher price. Demand

$3 A

9,000

Output
(in doses) Marginal Revenue
 Section 2 Questions
1. A monopoly is
(a) a market dominated by a single seller.
(b) a license that gives the inventor of a new product the exclusive right to sell it for a
certain amount of time.
(c) an industry that runs best when one firm produces all the output.
(d) an industry where the government provides all the output.
2. Price discrimination is
(a) a factor that causes a producer’s average cost per unit to fall as output rises.
(b) the right to sell a good or service within an exclusive market.
(c) division of customers into groups based on how much they will pay for a good.
(d) the ability of a company to change prices and output like a monopolist.
Section 3
Monopolistic competition
 It’s a thing
In monopolistic competition, many companies
compete in an open market to sell products which
are similar, but not identical.
1. Many Firms
As a rule, monopolistically competitive
markets are not marked by economies of scale or
high start-up costs, allowing more firms.
2. Few Artificial Barriers to Entry
Firms in a monopolistically competitive
market do not face high barriers to entry.
3. Slight Control over Price
Firms in a monopolistically competitive
VS.
market have some freedom to raise prices
because each firm's goods are a little different
from everyone else's.
4. Differentiated Products
Firms have some control over their
selling price because they can differentiate, or
distinguish, their goods from other products in the
market.
 Non-price Competition
Non-price competition is a way to attract customers through
style, service, or location, but not a lower price.

1. Characteristics of Goods
The simplest way for a firm to
distinguish its products is to offer a new size,
color, shape, texture, or taste.
2. Location of Sale
A convenience store in the middle of the
desert differentiates its product simply by selling
it hundreds of miles away from the nearest
competitor.
3. Service Level
Some sellers can charge higher prices
because they offer customers a higher level of
service.
4. Advertising Image
Firms also use advertising to create
apparent differences between their own offerings
 Prices, Profit, Output
Prices
Prices will be higher than they would be in
perfect competition, because firms have a
small amount of power to raise prices.
Profits
While monopolistically competitive firms
can earn profits in the short run, they have
to work hard to keep their product distinct
enough to stay ahead of their rivals.
Costs and Variety
Monopolistically competitive firms cannot
produce at the lowest average price due to
the number of firms in the market. They
do, however, offer a wide array of goods
and services to consumers.
Oligopoly describes a market dominated by a
few large, profitable firms.

Collusion
Collusion is an agreement among members of
an oligopoly to set prices and production levels.
Price- fixing is an agreement among firms to sell
at the same or similar prices.

Cartels
A cartel is an association by producers
established to coordinate prices and production.
Comparison of Market Structures
• Markets can be grouped into four basic structures: perfect
competition, monopolistic competition, oligopoly, and monopoly
Comparison of Market Structures
Perfect Monopolistic Oligopoly Monopoly
Competition Competition

Many Many Two to four dominate One

Number of firms

None Some Some None

Variety of goods

None Little Some Complete

Control over prices

None Low High Complete

Barriers to entry and exit

Wheat, Jeans, Cars, Public water

Examples shares of stock books movie studios
 Section 3 Assessment
1. The differences between perfect competition and monopolistic
competition arise because
(a) in perfect competition the prices are set by the government.
(b) in perfect competition the buyer is free to buy from any seller he or she
chooses.
(c) in monopolistic competition there are fewer sellers and more buyers.
(d) in monopolistic competition competitive firms sell goods that are similar
enough to be substituted for one another.
2. An oligopoly is
(a) an agreement among firms to charge one price for the same good.
(b) a formal organization of producers that agree to coordinate price and
output.
(c) a way to attract customers without lowering price.
(d) a market structure in which a few large firms dominate a market.
 Section 4
Regulation and deregulation
THEY HAVE THE POWER
Market power is the ability of a
company to control prices and
output.

Y
Markets dominated by a few
large firms tend to have higher
prices and lower output than

PRICIN
markets with many sellers.

To control prices and output like

a monopoly, firms sometimes
use predatory pricing.
Predatory pricing sets the
market price below cost levels
for the short term to drive out
G
competitors.
 Government
Competition
Government policies keep firms from controlling the prices and
supply of important goods. Antitrust laws are laws that encourage
competition in the marketplace.
1. Regulating Business Practices
The government has the power to regulate
business practices if these practices give too much
power to a company that already has few competitors.
2. Breaking Up Monopolies
The government has used anti-trust legislation
to break up existing monopolies, such as the Standard
Oil Trust and AT&T.
3. Blocking Mergers
A merger is a combination of two or more
companies into a single firm. The government can
block mergers that would decrease competition.
4. Preserving Incentives
In 1997, new guidelines were introduced for
proposed mergers, giving companies an opportunity to
show that their merging benefits consumers.
Deregulation
Deregulation is the removal of some
government controls over a market.

Deregulation is used to promote

competition.

Many new competitors enter a market

that has been deregulated. This is
followed by an economically healthy
weeding out of some firms from that
market, which can be hard on workers
in the short term.
1. Antitrust laws allow the U.S. government to do all of the
following EXCEPT
(a) regulate business practices
(b) stop firms from forming monopolies
(c) prevent firms from selling new experimental products
(d) break up existing monopolies
2. The purpose of both deregulation and antitrust laws is to
(a) promote competition
(b) promote government control
(c) promote inefficient commerce
(d) prevent monopolies