Economics 7

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Economics 7

  1. 1. Chapter 7: Market Structures
  2. 2. 7-1: Competition and Market Structures <ul><li>Adam Smith (1723 – 1790) </li></ul><ul><ul><li>Scottish philosopher and economist </li></ul></ul><ul><ul><li>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. </li></ul></ul><ul><ul><li>Believed that competition and individual self-interest would act as an “invisible hand” to guide resources to their most productive uses. </li></ul></ul><ul><ul><li>Laissez-faire - philosophy that government should not interfere with business activities (let it be) </li></ul></ul><ul><li>Market structure – nature and degree of competition among firms in the same industry market structures video </li></ul>
  3. 3. <ul><li>Perfect Competition - Theoretically ideal situation that is used to evaluate other market structures </li></ul><ul><li>perfect competition video </li></ul><ul><li>Necessary conditions: </li></ul><ul><li>1. No single buyer or seller is large enough or powerful enough to affect the price. </li></ul><ul><li>2. Identical products means that there is no need for brand names or to advertise, which keeps prices low. </li></ul><ul><li>3. Each buyer and seller acts independently, creating competition. </li></ul><ul><li>4. Buyers and sellers are well-informed about products and prices. </li></ul><ul><li>5. Buyers and sellers are free to enter into, conduct, and get out of business. </li></ul><ul><li>Market supply and demand set the equilibrium price for the product. Profit is maximized where marginal cost = marginal revenue. maximizing profits video </li></ul>
  4. 4. <ul><li>Monopolistic Competition is a market structure that shares all of the conditions of perfect competition except identical products. </li></ul><ul><li> </li></ul><ul><li>- Products are similar, but not identical. </li></ul><ul><li>- Product differentiation – real or perceived differences between competing products in the same industry. </li></ul><ul><li>- 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. </li></ul>
  5. 5. <ul><li>Oligopoly is a market structure where a few large sellers dominate the industry. </li></ul><ul><li>- Whenever one firm acts, the other firms in the industry usually follow, or they run the risk of losing customers. </li></ul><ul><li>- Often compete on a non-price basis by enhancing their products with new or different features. </li></ul><ul><li>- 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. </li></ul><ul><li>- 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. </li></ul>
  6. 6. <ul><li>Monopoly is a market structure with only one seller for a particular product monopoly video </li></ul><ul><li>Natural monopoly – occurs where the cost of production are minimized by having a single firm produce the product. </li></ul><ul><li>- Created by economies of scale , a situation in which the average cost of production falls as a firm gets larger. </li></ul><ul><li>Geographic monopoly – based on the absence of other sellers in a certain geographic area. </li></ul><ul><li>Technological Monopoly – based on ownership or control of a manufacturing method, process, or other scientific advance. (patent) </li></ul><ul><li>Government monopoly – monopoly owned and operated by the government </li></ul>
  7. 7. 7-2: Market Failures <ul><li>A market failure occurs when one or more of the conditions necessary for competitive markets does not exist. </li></ul><ul><li>1. Inadequate competition – not enough sellers or buyers </li></ul><ul><li>2. Inadequate information – not enough information available about market conditions </li></ul><ul><li>3. Resource immobility – land, capital, labor, and entrepreneurship do not move to markets where returns are the highest </li></ul><ul><li>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 </li></ul>
  8. 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. 9. 7-3: The Role of Government <ul><li>Maintain competition </li></ul><ul><li>Prohibit market structures that are not competitive. </li></ul><ul><li>- Antitrust legislation </li></ul><ul><li>Regulate markets when full competition is not possible. </li></ul><ul><ul><li>- See page 187 for a list of federal regulatory agencies and their tasks. </li></ul></ul><ul><li>Improve Economic Efficiency </li></ul><ul><li>Promote transparency and require public disclosure </li></ul><ul><li>Provide public goods, such as good roads and highways, museums and libraries, and education. </li></ul><ul><li>Modified Free Enterprise </li></ul><ul><li>Government intervention has created an economy based on markets with varying degrees of government regulation. </li></ul>

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