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Economics 7

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  • 1. Chapter 7: Market Structures
  • 2. 7-1: Competition and Market Structures
    • Adam Smith (1723 – 1790)
      • Scottish philosopher and economist
      • Introduced and recognized the importance of the concept of “division of labor”, the idea that labor becomes more productive as each worker becomes more skilled in a single job.
      • Believed that competition and individual self-interest would act as an “invisible hand” to guide resources to their most productive uses.
      • Laissez-faire - philosophy that government should not interfere with business activities (let it be)
    • Market structure – nature and degree of competition among firms in the same industry market structures video
  • 3.
    • Perfect Competition - Theoretically ideal situation that is used to evaluate other market structures
    • perfect competition video
    • Necessary conditions:
    • 1. No single buyer or seller is large enough or powerful enough to affect the price.
    • 2. Identical products means that there is no need for brand names or to advertise, which keeps prices low.
    • 3. Each buyer and seller acts independently, creating competition.
    • 4. Buyers and sellers are well-informed about products and prices.
    • 5. Buyers and sellers are free to enter into, conduct, and get out of business.
    • Market supply and demand set the equilibrium price for the product. Profit is maximized where marginal cost = marginal revenue. maximizing profits video
  • 4.
    • Monopolistic Competition is a market structure that shares all of the conditions of perfect competition except identical products.
    • - Products are similar, but not identical.
    • - Product differentiation – real or perceived differences between competing products in the same industry.
    • - Non-price competition – advertising, giveaways or other promotions designed to convince buyers that the product is somehow unique or better than a competitor’s. Advertising is important.
  • 5.
    • Oligopoly is a market structure where a few large sellers dominate the industry.
    • - Whenever one firm acts, the other firms in the industry usually follow, or they run the risk of losing customers.
    • - Often compete on a non-price basis by enhancing their products with new or different features.
    • - Collusion is a formal agreement to set specific prices, limit output, divide markets, or otherwise behave in a cooperative manner. Usually illegal because it restrains trade.
    • - Because of all the non-price competition, the product’s final price will be higher than it would be under monopolistic competition and much higher than under perfect competition.
  • 6.
    • Monopoly is a market structure with only one seller for a particular product monopoly video
    • Natural monopoly – occurs where the cost of production are minimized by having a single firm produce the product.
    • - Created by economies of scale , a situation in which the average cost of production falls as a firm gets larger.
    • Geographic monopoly – based on the absence of other sellers in a certain geographic area.
    • Technological Monopoly – based on ownership or control of a manufacturing method, process, or other scientific advance. (patent)
    • Government monopoly – monopoly owned and operated by the government
  • 7. 7-2: Market Failures
    • A market failure occurs when one or more of the conditions necessary for competitive markets does not exist.
    • 1. Inadequate competition – not enough sellers or buyers
    • 2. Inadequate information – not enough information available about market conditions
    • 3. Resource immobility – land, capital, labor, and entrepreneurship do not move to markets where returns are the highest
    • 4. Public goods – products that are collectively consumed by everyone. Because it is difficult to have all individuals pay their “fair share” of a public good, private markets produce too few of them. public goods video
  • 8. 5. Externalities – economic side effect that affects an uninvolved third party. Considered a market failure because their costs and benefits are not reflected in the market price. Negative externalities – harmful side effects, such as pollution or noise - can be corrected by charging a tax Positive externality - beneficial side effects, such as public education - can be corrected with subsidies externalities video
  • 9. 7-3: The Role of Government
    • Maintain competition
    • Prohibit market structures that are not competitive.
    • - Antitrust legislation
    • Regulate markets when full competition is not possible.
      • - See page 187 for a list of federal regulatory agencies and their tasks.
    • Improve Economic Efficiency
    • Promote transparency and require public disclosure
    • Provide public goods, such as good roads and highways, museums and libraries, and education.
    • Modified Free Enterprise
    • Government intervention has created an economy based on markets with varying degrees of government regulation.

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