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Perfect Competition CH 7.1

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Presentation on theme: "Perfect Competition CH 7.1"— Presentation transcript:

1 Perfect Competition CH 7.1 4 Conditions that exist in a perfectly competitive market 2 common barriers that prevent firms from entering a market Prices and output in a perfectly competitive market

2 Perfectly competitive market
A market in which a large number of firms produce the exact same product Product is available for the same price Each firm’s contribution to the market is small Only decision is how much to make, given the cost and market price

3 4 Conditions for Perfect Competition
1. Many buyers and sellers Many participants on both sides No individual can have enough power to influence the quantity in the market Everyone has to accept the prices as given Market will determine price

4 2. Identical Products No difference between the products sold by different suppliers Commodities - product that is the same no matter who sells it Low grade gas, paper, milk, fruit, Buyer will always choose the cheaper supplier

5 3. Informed buyers and sellers
Buyers know enough to look for a good deal Sellers too – best deal for them Full information is provided Clear incentives to gather/supply info Trade off? Time spent researching prices? How much is your time worth?

6 4. Free entry /exit Firms must be able to:
Enter the market - when they can make $ Exit the market - when they cannot If a company has more competition, it has to sell its product for less If less competition and more control, it can charge more

7 Barriers to Entry Factors that keep firms from getting into a market and result in imperfect competition 1. Start up costs Before you can start earning money, you have to make an investment Higher costs = less firms Impact of the Internet?

8 Barriers to Entry 2. Technology
Lots of technology required - higher barrier Lots of technological know how/ skills/ training also offer higher barriers

9 Efficiency Perfectly competitive markets are very efficient
Competition keeps Prices and Costs low Prices reflect cost Lowest sustainable prices Only make enough to cover your costs and profiting enough to make it worthwhile to stay in business

10 Monopoly How Economists define Monopoly How do they form
CH 7.2 How Economists define Monopoly How do they form Govt monopolies How do they set price and output level Price Discrimination

11 Monopoly When barriers prevent firms from entering the market that has a single supplier A market dominated by a single supplier They take advantage of their power by charging high prices

12 Forms of monopolies Economies of scale
Condition when a producers costs go down as production goes up Bigger is better Hydroelectric Power

13 Forms of monopolies Natural Monopolies
Market that runs most efficiently when one large firm controls the market In exchange for being the only firm in the market, Govt will control prices

14 Forms of monopolies Technology can affect monopolies
Improvements in technology can break up a monopoly Telephones/ Cell phones Cable/ Satellite Blockbuster/Streaming (Netflix)

15 Govt Monopolies Govt regulates natural monopolies
Govt can also create monopolies Patents Guarantees profits on research/ investment Franchises contract to sell specific goods within an exclusive market Licenses right to operate a business

16 Output decisions Even monopolies have to choose between output and price Really cannot charge whatever they want Possibility to price yourself out of the market Elasticity of goods

17 Price discrimination Targeting different consumers, allows you to charge different amounts Exists all over – not just in monopolies Market Power - ability of a company to change prices and output like a monopoly without being one

18 Price Discrimination Targeted Discounts
Identify people who would not be willing to pay top price Give them a discount Elderly/Students? Identify those who need it the most Charge them the most Medical coverage/ prescriptions/treatment

19 Examples Airline tickets Senior/ Student discounts Kids eat/stay free
Traveling for business may cost more Booking in advance will be cheaper Senior/ Student discounts Kids eat/stay free Attract families

20 Limits on Price Discrimination
Must meet three conditions 1. Must have some market power 2. Must be able to divide customers into groups based on sensitivity to price 3. Difficult resale Cannot sell something for a price, and then have customers sell it to others for a higher price

21 Monopolistic Competition
CH 7.3 Monopolistic Competition Many companies compete selling similar goods Modified perfect competition Not identical goods Each company has a monopoly on their version of a good Prices will be higher than perfectly competitive

22 4 Conditions 1. Many sellers/firms 2. Few barriers to entry
Start up costs are low 2. Few barriers to entry 3. Some control over the price Goods are slightly different Substitutes 4. Differentiated products* Distinguish your goods from others

23 Nonprice Competition Ways to compete w/o changing price
Physical characteristics Sizes, shapes, colors Location Service Level Advertising, Image or status

24 Oligopoly Market dominated by a few large firms Some barriers to entry
3 or 4 firms that produce % Some barriers to entry High start up costs Economies of scale

25 Cooperation and Collusion
If these 3-4 companies work together they can eliminate other competition Collusion Agreement to set prices and production levels Price Fixing Price wars

26 Cartels Agreement to organize production and prices
Usually don’t last long Incentive to produce more = $$$ Creates too much supply Excluding someone Lower price than cartel

27 Comparison of Market Structures
Perf. Comp. Monop. Comp. Oligopoly Monopoly # of firms Many Many Few ONE Variety None None Some Some Control of $ None Little Complete Some Barriers to entry High Complete None Low Jeans, Books Examples Wheat, Stock Public Water Cars, Movie Studios

28 Regulation and Deregulation
CH 7.4 Regulation and Deregulation How do firms use market power Practices that the Govt regulates or bans to protect competition Deregulation and its effects

29 Market Power Markets with a few large firms generally have higher prices When these companies work together they can control the prices Predatory pricing - setting your price lower than costs to drive out competition

30 Govt and Competition Govt policy prevents firms from controlling price and supply of a good in a market Federal Trade Commission Department of Justice Anti Trust Division

31 Grouping/Cooperation of companies
Collusion Cartels Trusts - illegal grouping of companies that discourages competition

32 Anti Trust Laws Sherman Anti Trust Act - 1890
Outlawed mergers and monopolies that limited trade between states Basis of most legislation today US breaks up Standard Oil They had controlled 88% of refined oil in US Clayton Anti Trust Act Prohibits certain behaviors that can lead to monopoly

33 Anti Trust Robinson-Patman Act - 1936 1982 - Govt breaks up AT&T
Laws against price discrimination Govt breaks up AT&T Microsoft declared Monopoly by Govt

34 Mergers Combination of one or more companies
Govt will look to see if this will lead to unfair advantages/ less competition If the merger will lead to lower costs, lower prices or better products the govt will allow it

35 Deregulation 1970s 1980s Govt took itself out of controlling several industries Airline, trucking, railroad, TV broadcasting, natural gas, banking No longer controlled prices Force firms to compete and drive prices down

36 Deregulation +/- + - Lowers barriers to entry Widespread growth
Banking industry (1980s) Banks took more risks with loans, lost $$ Govt spent billions covering losses

37 Airline industry After deregulation, lots of new airlines popped up
Some went out of business Some merged w/ others Prices to big cities went down Small cities?

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