Chapter Intro 2 1.The profit motive acts as an incentive for people to produce and sell goods and services. 2.Economists look at a variety of factors to assess the growth and performance of a nation’s economy. 3.Governments strive for a balance between the costs and benefits of their economic policies to promote economic stability and growth.

Section 1-Preview Section Preview In this section, you will learn that market structures include perfect competition, monopolistic competition, oligopoly, and monopoly.

Section 1-Key Terms Content Vocabulary laissez-faire market structuremarket structure perfect competitionperfect competition imperfect competitionimperfect competition monopolistic competitionmonopolistic competition product differentiationproduct differentiation nonprice competitionnonprice competition oligopoly collusion price-fixing monopoly natural monopolynatural monopoly

Section 1 Competition and Market Structures In 1776, the average factory was small and businesses were competitive. Laissez-faire was the economic philosophy.Laissez-faire The supply side of the market today has many firms of different sizes producing slightly different products. These conditions help determine market structure.market structure Economists group businesses into four market structures.

Section 1 Perfect Competition Perfect competition is an ideal market situation used to evaluate other market structures. Perfect competitionPerfect competition—a theoretical ideal used to evaluate other market structures

Section 1 Perfect competition has five necessary conditions: Perfect Competition (cont.) 1.There is a large number of buyers and sellers. 2.Buyers and sellers deal in identical products. 3.Each buyer and seller acts independently. 4.Buyers and sellers are well informed about prices and products. 5.Buyers and sellers are free to enter, conduct, and shut down.

Section 1 Market supply and demand set the product’s equilibrium price. Few perfectly competitive markets exist. Perfect Competition (cont.)

Section 1 Imperfect competition results inImperfect competition –Less competition –Higher prices for consumers –Fewer products offered Perfect Competition (cont.)

Section 1 Monopolistic Competition Monopolistic competition shares all the conditions of perfect competition except the same goods or services.

Section 1 Under monopolistic competition, products are similar.monopolistic competition Monopolistic—seller’s ability to raise the price within a narrow range Competitive—If sellers raise or lower the price enough, customers will ignore minor differences and change brands. Monopolistic Competition (cont.)

Section 1 Monopolistic competition is characterized by product differentiation.product differentiation This is done through nonprice competition.nonprice competition Monopolistic Competition (cont.)

Section 1 Oligopoly Oligopoly describes a market in which a few sellers dominate an industry. OligopolyOligopoly products may have distinct features like makes and models in the auto industry; or products that can be standardized as in the steel industry.

Section 1 Because oligopolies are so large, when one firm lowers its price or introduces a new product, other firms follow. This interdependent behavior takes the form of collusion.collusion Oligopoly (cont.) –Price-fixingPrice-fixing –Collusion restrains trade and is against the law.

Section 1 Monopoly A monopoly is a market with only one seller for a particular product.

Section 1 Monopoly is at the opposite end of the spectrum from perfect competition.Monopoly Monopoly (cont.) Few real monopolies exist today. –Americans dislike them. –New technologies compete with existing monopolies. Characteristics of Market Structures

Section 1 Types of monopolies Monopoly (cont.) –Natural monopolyNatural monopoly Government gives a public utility a franchise. Economies of scale

Market Structures We can differentiate among four different market structures. One is called perfect competition; the other three are different kinds of imperfect competition. VS 1

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