A developer has acquired thelarge piece of vacant landacross the street from yourhouse and plans to build alarge shopping mall on theproperty. How might youbenefit from the mall? Howmight it negatively impactyour life? Read Chapter 7 tolearn about market structuresand economic growth.
1. The profit motive acts as an incentive for people to produce and sell goods and services.2. Economists look at a variety of factors to assess the growth and performance of a nation’s economy.3. Governments strive for a balance between the costs and benefits of their economic policies to promote economic stability and growth.
Section PreviewIn this section, you will learn that marketstructures include perfect competition,monopolistic competition, oligopoly, andmonopoly.
Competition and Market Structures• In 1776, the average factory was small and businesses were competitive. Laissez-faire was the economic philosophy.• The supply side of the market today has many firms of different sizes producing slightly different products.• These conditions help determine market structure.
Market Structures We can differentiate among fourdifferent market structures. One is called perfectcompetition; the other three are different kinds ofimperfect competition.
Perfect Competition Perfect competition is an ideal market situation used to evaluate other market structures.
Perfect Competition (cont.)• Perfect competition—a theoretical ideal used to evaluate other market structures Perfect Competition and Profit Maximization
Perfect Competition (cont.)• Perfect competition has five necessary conditions: 1. There is a large number of buyers and sellers. 2. Buyers and sellers deal in identical products. 3. Each buyer and seller acts independently. 4. Buyers and sellers are well informed about prices and products. 5. Buyers and sellers are free to enter, conduct, and shut down.
Perfect Competition (cont.)• Market supply and demand set the product’s equilibrium price.• Few perfectly competitive markets exist.
Perfect Competition (cont.)• Imperfect competition results in – Less competition – Higher prices for consumers – Fewer products offered
Monopolistic Competition Monopolistic competition shares all the conditions of perfect competition except the same goods or services.
Monopolistic Competition (cont.)• Under monopolistic competition, products are similar.• Monopolistic—seller’s ability to raise the price within a narrow range• Competitive—If sellers raise or lower the price enough, customers will ignore minor differences and change brands.
Monopolistic Competition (cont.)• Monopolistic competition is characterized by product differentiation.• This is done through nonprice competition.
Oligopoly Oligopoly describes a market in which a few sellers dominate an industry.
Oligopoly (cont.)• Oligopoly products may have distinct features like makes and models in the auto industry; or products that can be standardized as in the steel industry.
Oligopoly (cont.)• Because oligopolies are so large, when one firm lowers its price or introduces a new product, other firms follow.• This interdependent behavior takes the form of collusion. – Price-fixing – Collusion restrains trade and is against the law.
Monopoly A monopoly is a market with only one seller for a particular product.
Monopoly (cont.)• Monopoly is at the opposite end of the spectrum from perfect competition.• Few real monopolies exist today. – Americans dislike them. – New technologies compete with existing monopolies. Characteristics of Market Structures
Monopoly (cont.)• Types of monopolies – Natural monopoly • Government gives a public utility a franchise. • Economies of scale
Monopoly (cont.)• Types of monopolies – Geographic monopoly – Technological monopoly— Government grants a patent or copyright. – Government monopoly Profiles in Economics: Bill Gates
Section PreviewIn this section, you will find out that inadequatecompetition, inadequate information, immobileresources, public goods, and externalities canlead to market failures.
Types of Market Failures Markets can sometimes fail because of inadequate competition, inadequate information, resource immobility, public goods, and externalities.
Types of Market Failures (cont.)• Five main causes of market failure – Inadequate competition – Inadequate information – Resource immobility – Public goods
Types of Market Failures (cont.)• Five main causes of market failure – Externalities • Negative externality • Positive externality
Market Failures When one of the conditionsnecessary for competitive markets does not exist,market failures can occur. Markets usually failbecause of one of five factors.
Dealing with Externalities Externalities indicate a market failure and can be corrected with government action.
Dealing with Externalities (cont.)• Externalities distort decisions made by consumers and producers, resulting in a less efficient economy.
Dealing with Externalities (cont.)• Correcting negative externalities – Government adds a tax onto products sold by the firm. – Firms have less incentive because the tax increases their product’s price. – Higher prices reduce quantity demanded. – People affected may face fewer problems.
Dealing with Externalities (cont.)• Correcting positive externalities – Subsidizing local programs, such as education, helps communities. – Programs are expensive and many are left underfunded.
Section PreviewIn this section, you will learn that one of theeconomic functions of government in a marketeconomy is to maintain competition.
Content Vocabulary• trust • cease and • public disclosure desist order• price discriminationAcademic Vocabulary• restrained • intervention
Maintain Competition The government exercises its power to maintain competition within markets.
Maintain Competition (cont.)• Two ways government maintains competitive markets – Prohibiting market structures that are not competitive – Regulating markets where full competition is not possible
Maintain Competition (cont.)• Laws have historically been passed to restrict monopolies and trusts. – Congress passed the Sherman Antitrust Act in 1890. – Clayton Antitrust Act in 1914 outlawed price discrimination. Anti-Monopoly Legislation
Maintain Competition (cont.)• Laws have historically been passed to restrict monopolies and trusts. – Federal Trade Commission Act gave authority to issue a cease and desist order. Anti-Monopoly Legislation
Maintain Competition (cont.)• Natural monopolies are not necessarily bad and therefore should not be broken up.• Many monopolies are regulated by government agencies. Federal Regulatory Agencies
Improve Economic Efficiency Providing public goods and promoting transparency can improve economic efficiency.
Improve Economic Efficiency (cont.)• Efficient and competitive markets need adequate and transparent information.• Therefore, public disclosure is paramount to economic efficiency.
Improve Economic Efficiency (cont.)• Truth-in-advertising laws• Consumer lending laws• Securities and Exchange Commission• Government documents, studies, and reports are available in public libraries.
Improve Economic Efficiency (cont.)• Government provides many public goods because a free economy does not promote them.• Public goods, like decent roads and highways, make the economy more productive.• Firms need an educated workforce.
Modified Free Enterprise Because the government is involved in certain aspects of our economy, it is a modified version of free enterprise.
Modified Free Enterprise (cont.)• A modified free enterprise economy is a result of the U.S. economy evolving over time.• Government has a responsibility to protect the rights of workers and protect consumers from false claims, harmful products, and price gouging.
Modified Free Enterprise (cont.)• Now government concerns are focused on promoting economic efficiency by supplying public goods and promoting transparency.
Government Roles In order to carry out its legaland social obligations, the government canencourage competition and regulate monopolies.