1. Market Structures Chapter 7

2. MARKET STRUCTURES AND BUSINESS ORGANIZATIONS

3. Market Structures: Perfect Competition = pure price competition Four condition for perfect competition 1. Many buyers and sellers in the market- one company can’t influence the total market; they are price takers - the market determines prices 2.Sellers offer identical products- (commodities) buyers will always choose the supplier with the lowest price

4. Buyers/ sellers are well informed- we go out to find the best deal which means we must have all the information on the product/ the time spent must be worth the amount of money to be saved Free market entry or exit into the market- this means there will be no barriers to entry such as start up costs and technology Examples: farm products, stocks, low grade gas, milk Competition within markets keeps prices low

5. How much variety of goods is there in a perfect competition

6. Barriers to Entry Factors that would make it difficult for new firms to enter the market are called “barriers to entry”. Barriers can lead to what is called imperfect competition. Common barriers to entry include start-up cost and technology. Start-up cost- expense a new business must pay before the first product reaches the customer

7. Technology- know how and equipment to create the product and produce the product. Price and Output Perfectly competitive markets are efficient which is one of their characteristics. Prices and production costs are low Inputs like land, labor, organizational skills machinery and equipment are used to their best potential. In a perfectly competitive market prices correctly represent the opportunity cost of each product.

9. Monopoly = Market is dominated by a single seller Monopolies tend to form when barriers to entry exist and then they can charge whatever price they want; supplies are usually lower when there is a monopoly. Types of monopolies: Natural- firms can only cover costs with no competition such as utilities Government- created by the government Examples- The post office, patent office

11. patents- is a license giving the inventor exclusive rights (usually for 17 years); this promotes research and development Industrial Organizations= Sports franchises. The government allows the team owners and professional sports leagues to restrict the numbers and location of their teams

13. Monopolistic Competition= can exist under four conditions When there are many firms Few barriers to entry- other firms can enter market easily and cheaply with few or no restrictions Differentiated products-ex: hamburgers Slight control over price- can ’ t make too many changes because of substitutes

14. Non-price Competition: Occurs when a firm uses means other than price to compete Physical characteristics- new size, color, shape, texture, etc. Location- very important factor Service level- higher levels of service may allow a company to charge higher prices Advertising, image, or status – product differences are often just a matter of perception

15. Marketing- operates under the four P ’ s Price- advertising must make clear assertions of a product ’ s value Place- ads must include directions so consumers will know where to find it Product- ads must provide enough information so consumers will be informed and desire to make purchases Promotion- ads must promote a product in a way that catches attention

16. Oligopoly Is a Market dominated by few large firms Occurs when the largest firms produce at least 70-80% of the items Tend to form when there are major barriers to entry, such as high start up costs or an established reputation to compete against. Bad practices include price leadership, collusion, and cartels, but they are very difficult to achieve and maintain Examples - cereal, cola, airlines, cars

18. Government ’ s Role: Regulation and deregulation In a free market society, does the government need to regulate a business. Isn ’ t the point of free enterprise to allow the market to regulate itself?

19. Arguments for regulation: A lack of competition will negatively affect prices and supplies of products through predatory pricing. (remember standard oil and John D. Rockefeller) The government passes antitrust laws to out-law monopolies or prevent the forming of them from unfair practices Can break up companies who have a monopoly Can block mergers that would reduce competition