Lesson 10--mkt-structures[1]


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Lesson 10--mkt-structures[1]

  1. 1. Market StructuresAcademic Decathlon—Lesson 10 Berryhill Economics
  2. 2. Market Structures Laissez Faire—philosophy that the government should not interfere with commerce or trade (French term meaning “allow them to do”) Adam Smith’s theory that government is only to protect private property, enforce contracts, settle disputes, and protect domestic companies from foreign competitors
  3. 3. Market Structures Wealth of Nations, written by Adam Smith in 1776, enforced this Laissez Faire policy and the U.S. adopted many of its economic ideas and the government played a small (if any) roll in the market of good and services By the 1800s, however, competition was weakening
  4. 4. Market Structures Due to mergers and acquisitions, many small firms in an industry were combined into few very large businesses This is when government started stepping in and regulating the market more The government tries to keep competition active in most markets, but there are a number of different types of markets classified according to the conditions that prevail in them
  5. 5. Market Structure Market structure—the nature and degree of competition among firms in the same industry
  6. 6. Perfect Competition Perfectcompetition—large number of well informed independent buyers and sellers whom exchange identical products Example: local vegetable farming Necessary Conditions:  Large number of buyers and sellers; no single buyer or seller is large enough or powerful enough to affect price
  7. 7. Perfect Competition Necessary Conditions (cont.)  Buyers and sellers deal in identical products  Each buyer and seller acts independently— this competition is one of the forces that keep prices low  Buyers and sellers are reasonably well- informed about products and prices  Buyers and sellers are free to enter into, conduct, or get out of business
  8. 8. Perfect Competition Market forces of supply an demand establish the equilibrium price. The perfectly competitive firms operate where marginal cost = marginal revenue; there profits are maximized.
  9. 9. Perfect Competition Few, if any, perfectly competitive markets exist, but local vegetable farming comes closest. Imperfect competition is the name given to a market that lacks one or more of the conditions of perfect competition; most firms in the U.S. fall into the imperfect competition classification. Perfect competition is still important because economists use it to evaluate other market structures.
  10. 10. Monopolistic Competition Monopolistic competition--market structure that has all the conditions of perfect competition EXCEPT for identical products Example: Athletic shoe industry Non-price competition—the use of advertising, give-aways, or other promotional campaigns to convince buyers that the product is somehow better than another brand
  11. 11. Monopolistic Competition Product differentiation—real OR imagined differences between competing products in the same industry If a firm can differentiate a product in the mind of the buyer, the firm can raise its price. Profit is again maximized where MC=MR
  12. 12. Oligopoly Oligopoly—a market structure in which a few very large sellers dominate the industry Product may be differentiated (like the auto industry) or standardized (like the steel industry). Examples: soft drinks, airlines, fast food, autos
  13. 13. Oligopoly Because oligopolists are so large, whenever one firm acts, the other firms usually follow. This is called interdependent behavior— prices tend to move together across the industry. Another type of interdependent behavior is collusion—a formal agreement to set prices or to cooperate in some manner.
  14. 14. OligopolyA type of collusion is price fixing— agreeing to charge the same or similar prices for a product. Firms can also collude to divide the market so all are guaranteed to sell a certain amount. Because collusion usually restrains trade and fair competition, it is illegal.
  15. 15. Oligopoly Because prices within an oligopolistic market tend to move together, most firms tend to compete on a nonprice basis with advertising or other product differentiating. Oligopolists maximize profits where MC=MR.
  16. 16. Monopolies Monopoly—market structure with only one seller of a particular product Very few monopolies exist in the U.S. because of anti-trust laws—laws that outlaw monopolies.
  17. 17. Types of Monopolies Natural monopoly—a market situation where the costs of production are minimized by having a single firm produce the product. Examples: telephone companies in one area, public utilities  Justification for a natural monopoly is economies of scale—a situation in which the average cost of production falls as the firm gets larger Geographic monopoly—a monopoly based on the absence of other sellers in a certain geographic area. Example: gas station on a lonely highway
  18. 18. Types of Monopolies Technological monopoly—a monopoly based on ownership or control of a manufacturing method, process, or other scientific agreement. Example: companies with patents or copyrights Government Monopoly—a monopoly the government owns and operates. Examples: uranium, water use, etc.
  19. 19. Monopolies Monopolies are price makers—they do not rely on supply and demand to set the market price (because they are the only supplier). Monopolies will charge more for its product if not regulated, but it will still operate at the profit maximizing point of MC=MR.