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2  Markets are the most efficient way to allocate resources  Experts or planner are not needed to make sure markets run efficiently—they do that on their own  Yet for a market to remain efficient, a certain degree of competition is necessary › If there was a model of a market it would be called perfect competition

3  What would happen if a gas station raised its current price 20% higher tomorrow? Why?  What would happen if the power company raised its price 20% higher tomorrow? Why

4  There are 2 types of markets: competitive and imperfectly competitive › Firms in competitive markets are referred to as price takers  In competitive markets a firm’s size is small compared to the market—thus they have little influence on price › Or little market power

5  Competitive markets are sometimes called perfectly competitive › Also called PURE  Perfectly competitive markets have a large number of small firms all producing the same product with the same technology  No one single firm can influence price.

6  1. Many buyers and sellers participate in the market.  2. Goods offered are largely the same (identical)  3. Buyers and sellers are well informed about products.  4. Sellers are able to freely enter and exit the market.

7  Because there are lots of firms, no one firm has enough market share to influence the entire market.  There are so many consumers that no one buyer can influence price, their purchases represent a small portion of output  Supply and demand determine selling prices.

8  Very little difference in products sold by suppliers  These products may be called commodities › Milk, notebook paper, bacon  The buyer will not pay extra for one particular company’s goods. They will always choose the supplier with the lowest price.  Thus prices are driven down lowering profits and the incentive to enter the market

9  Buyers know enough to get the best deal.  Buyer has full information about features and price.  Informed decisions are determined by tradeoff between time spent researching versus the amount of money saved.

10  Few if any barriers to entry  Firms can enter the market to profit › Leave the market when they do not make money.  Markets with more firms, have more competition and lower prices. › Thus less profit

11  Barrier can be any factor that keeps firms from entering the market to compete  Examples of barriers: › Start up costs, technology, profit margins, patents, copyrights


13  Single supplier of a product with no close substitutes  Main cause of monopolies is barriers to entry  Economies of scale – characteristics that cause a producer’s average cost to drop as production rises. › Additional units cost LESS to produce, not more

14  There are 3 main barriers to entry in a monopolistic market › A key resource may be owned by the firm › Government may provide the exclusive right to operate in a given market › The costs of production for a single seller may be more efficient than a large number of sellers ZsKZOc&feature=related

15  Many times the monopolist faces an occurrence called economies of scale  A monopolist benefits as output increases and costs decrease  Whereas a large number of firms see costs rise as they are able to produce less per firm as more firms enter the market

16  Natural monopoly – market that runs most efficiently when one large firm provides all of the output (public water)  Government monopoly – government provides exclusive right to a market of good/service  Technological monopoly – exclusive rights to sell a particular technology

17 FFranchises – contract issued by a local authority that gives a single firm the right to sell its goods within a market LLicense – government issues the right to operate a business (radio, tv) ›P›Professional sports leagues are great examples of licensing and franchises (Industrial Organizations)

18  Monopolists don’t have as much control over prices as we think  Monopolists must choose either output or price to maximize profits.  They must choose a level of output that yields the highest profits like other firms

19  Practice of charging different customers different amounts  For a firm to price discriminate, it must have two things: › Ability to control prices somewhat (some market power) › Item is difficult to resell (hamburger, movie ticket) › Ability to separate customers by their willingness to pay  Age, geography, income  Examples include: airline tickets, movie tickets, manufacturer rebates, grocery store cards

20  Every firms has a monopoly over selling its similar product  Many Firms  Few barriers to entry (no patent on cola)  Slight control over price › Most competition is over anything BUT price  Differentiated products (not identical)

21  Trying not to compete based on price alone  Instead: › Physical characteristics (texture, shape, color, taste) › Location (grocery stores, movie theatres) › Service Level (Chick-fil-A vs. McDonald’s) › Advertising, image, or status  Celebrities endorsements, sponsorships

22  AGAIN, firms want to maximize profits  Prices under monopolistic competition will be higher than in perfect competition, because firms have some market power. › Yet firms are not entirely dealing with inelasticity even though their products are different › You MAY be willing to pay 5$ more for an exotic meal, but not $15 or $30 more › Also, higher profit margins attract new firms into the market, increasing output and lowering prices

23  Dominated by a few large, firms (usually 2-4)  Firms sell very similar products and control 70-80% of a market’s output  Firms interact strategically  They may cooperate or collude (acting like a monopolist) › agreeing to set prices or output levels ( price fixing )  Or they may compete ruthlessly  Engaging in a price war competitors slash their prices very low to steal one another’s business m_campaign=viewpage&utm_medium=grid&utm_source=grid

24  Monopoly and oligopoly can be bad for consumers › Raising prices, creating shortages, lowering quality  Firms can collude, merge, form a cartel, set prices or outputs to drive competitors away › Setting prices so low that they become a barrier to entry is called predatory pricing

25  Federal government has a number of policies and agencies to police companies’ ability to control markets  Regulation involves government intervention in a market › FTC, Justice Department’s Antitrust Division › Antitrust laws (Sherman and Clayton Antitrust Acts) › Oversees mergers (XM & Sirius Radio, Ticketmaster & Livenation)

26  Deregulation is the removal of market controls by government  Can increase competition in industries stifled by powerful firms  More competition is intended to lower prices and improve quality  Deregulated industries include: › Airlines, trucking, banking, railroad, natural gas, TV, energy

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