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Unit 3 Microeconomics: Prices and Markets

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1 Unit 3 Microeconomics: Prices and Markets
Chapters 7.3 Economics Mr. Biggs

2 Monopolist Competition
and Oligopoly Perfect competition and monopoly are two extreme market structures and very few markets fall into these categories. Most markets fall into the following two categories: Monopolistic competition Oligopoly

3 Monopolist Competition
Monopolist competition - A market structure in which many companies sell products that are similar but not identical. Prices will be higher than in perfect competition. For example, Jeans are all denim pants, but they are different enough to provide competition. Four Conditions of Monopolistic Competition Many firms Few artificial barriers to entry Slight control over price Differentiated products Differentiation - Making a product different from other similar products.

4 Nonprice Competition Nonprice competition - A way to attract customers through style, service, or locations but not a lower price. Nonprice competition takes several different forms: Physical characteristics New size, color, shape, texture, or taste Location Home location or gas station in the desert Service level High level of service Advertising, image, or status Designer hand bags

5 Price, Outputs, and Profits
Monopolistic competition looks very much as it would under perfect competition. Price Monopolistic competition prices will be higher than perfect competition prices, but lower than monopoly prices. Output Total output under monopolistic competition falls between perfect competition and monopoly. Profit Monopolistically competitive firms can earn profits in the short run, but they have to work hard to keep their products distinct to stay ahead of their rivals. Production Costs and Variety Monopolistically competitive firms provide a large variety of goods, but not at the lowest cost.

6 Oligopoly Barriers to Entry
Oligopoly - A market structure in which a few large firms dominate the market. If the four largest firms produce 70-80% of the market output, then it is an oligopoly market. The biggest firms in an oligopoly may set prices higher and output lower than in a perfectly competitive market. For example, breakfast cereals, air travel, and household appliances. Barriers to Entry Lack of license or patent, high start up costs, economy of scale, or competition with larger companies are all barriers to entry.

7 Cooperation and Collusion
Oligopolies often seem to engage in collusion, even if its not true. Three practices that concern governments are: Price leadership can be started when a market leader makes its pricing plans clear to the other firms. Price war - A series of competitive price cuts that lowers the market price below the cost of production. Collusion - An agreement among firms to divide the market, set price, or limit production. Price fixing - One outcome of collusion which is an agreement among firms to charge one price for the same good.

8 Cartels Cartel - A formal organization of producers that agree to coordinate price and production. Cartels only work if every member keeps to the agreed output levels. For example, the Organization of the Petroleum Exporting Countries (OPEC) is a cartel of twelve developing countries. Cartels are illegal in the United States. Comparison of market structures:

9 The End

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