7-1: Competition and Market Structures<br />Adam Smith (1723 – 1790)<br />Scottish philosopher and economist<br />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.<br />Believed that competition and individual self-interest would act as an “invisible hand” to guide resources to their most productive uses.<br />Laissez-faire - philosophy that government should not interfere with business activities (let it be)<br />Market structure – nature and degree of competition among firms in the same industry market structures video<br />
Perfect Competition - Theoretically ideal situation that is used to evaluate other market structures <br />perfect competition video<br />Necessary conditions:<br /> 1. No single buyer or seller is large enough or powerful enough to affect the price.<br /> 2. Identical products means that there is no need for brand names or to advertise, which keeps prices low.<br /> 3. Each buyer and seller acts independently, creating competition.<br /> 4. Buyers and sellers are well-informed about products and prices.<br /> 5. Buyers and sellers are free to enter into, conduct, and get out of business.<br />Market supply and demand set the equilibrium price for the product. Profit is maximized where marginal cost = marginal revenue. maximizing profits video<br />
Monopolistic Competitionis a market structure that shares all of the conditions of perfect competition except identical products.<br /> - Products are similar, but not identical.<br /> - Product differentiation – real or perceived differences between competing products in the same industry.<br /> - 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.<br />
Oligopoly is a market structure where a few large sellers dominate the industry.<br /> - Whenever one firm acts, the other firms in the industry usually follow, or they run the risk of losing customers.<br /> - Often compete on a non-price basis by enhancing their products with new or different features.<br /> - 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.<br /> - 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.<br />
Monopoly is a market structure with only one seller for a particular product monopoly video<br />Natural monopoly – occurs where the cost of production are minimized by having a single firm produce the product.<br /> - Created by economies of scale, a situation in which the average cost of production falls as a firm gets larger.<br />Geographic monopoly – based on the absence of other sellers in a certain geographic area.<br />Technological Monopoly – based on ownership or control of a manufacturing method, process, or other scientific advance. (patent)<br />Government monopoly – monopoly owned and operated by the government<br />
7-2: Market Failures<br />A market failure occurs when one or more of the conditions necessary for competitive markets does not exist.<br /> 1. Inadequate competition – not enough sellers or buyers<br /> 2. Inadequate information – not enough information available about market conditions<br /> 3. Resource immobility – land, capital, labor, and entrepreneurship do not move to markets where returns are the highest <br /> 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<br />
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.<br />Negative externalities <br /> – harmful side effects, such as pollution or noise<br /> - can be corrected by charging a tax<br />Positive externality<br /> - beneficial side effects, such as public education<br /> - can be corrected with subsidies<br />externalities video<br />
7-3: The Role of Government<br />Maintain competition<br />Prohibit market structures that are not competitive. <br /> - Antitrust legislation<br />Regulate markets when full competition is not possible.<br />- See page 187 for a list of federal regulatory agencies and their tasks.<br />Improve Economic Efficiency<br />Promote transparency and require public disclosure<br />Provide public goods, such as good roads and highways, museums and libraries, and education. <br />Modified Free Enterprise<br /> Government intervention has created an economy based on markets with varying degrees of government regulation.<br />
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