[ 4.1 ] Pure Competition

Conditions for Pure Competition You have decided to cook dinner. As you shop for produce at the local farmer’s market, you see many fruits and vegetables being offered by several different suppliers. Yet each supplier charges the same price for these fruits and vegetables. On the way home, you wonder why buying a leather jacket, a car, or a high-definition television isn’t as simple as buying produce at the local farmer’s market.

Conditions for Pure Competition Many Buyers and Sellers Identical Products Informed Buyers and Sellers Easy Market Entry and Exit

Conditions for Pure Competition A purely competitive market has many suppliers selling identical products called commodities. Analyze Information Why isn’t the market for automobiles a purely competitive market?

Barriers to Entry and Competition High Start-Up Costs Complex Technology

Barriers to Entry and Competition A movie production company requires so much equipment that it usually has high start-up costs.

Price, Output, and Purely Competitive Markets One of the primary characteristics of purely competitive markets is that they are efficient. Competition within these markets keeps both prices and production costs low. Firms must use all inputs—land, labor, organizational skills, machinery and equipment—to their best advantage. As a result, the prices that consumers pay and the revenue that suppliers receive accurately reflect how much the market values the inputs used to produce the product. In a purely competitive market, prices correctly represent the opportunity costs of each product.

Price, Output, and Purely Competitive Markets In pure competition, suppliers must match the lowest supplier’s price or exit the market. Apply Concepts Why are consumers unwilling to pay one supplier’s higher price in such a market?

Quiz: Conditions for Pure Competition Why are individual suppliers unable to set their own prices in a purely competitive market? A. Their products are too unique to generate demand. B. The market is flooded with excessive supply. C. They do not have enough influence over the market. D. Government price fixing takes away their freedom of action.

Quiz: Barriers to Entry and Competition Which type of business would have the lowest technological barrier to entry? A. dog walking B. medical laboratory C. payroll processing firm D. smartphone app development

Quiz: Price, Output, and Purely Competitive Markets Why is a purely competitive market undesirable for owners of supplier firms in that market? A. high revenues B. high wages C. low costs D. low profits

[ 4.2 ] Monopolies

Characteristics of a Monopoly Economies of Scale Natural Monopolies Technology and Change

Characteristics of a Monopoly Some scientists believe the average cost of developing a new drug is about $1 billion. High development costs such as these are a barrier to entry that can lead to monopolies.

Characteristics of a Monopoly In a monopoly, one company controls the entire market. Analyze InformationWhat are some barriers to entry that might allow a monopoly to exist?

Characteristics of a Monopoly With economies of scale, production costs continue to fall as output increases.Analyze Graphs Describe the cost curve for a firm without economies of scale.

The Role of Government Technological Monopolies Franchises and Licenses Industrial Organizations

The Role of Government The patents shown here have given their inventors monopolies for a limited period of time. Analyze Information How do patents such as these encourage new ideas?

Output Decisions The Monopolist’s Dilemma Falling Marginal Revenue Setting a Price Profits

Output Decisions Analyze Graphs In what year do the prices of prescription drugs diverge from the prices of the general price index?

Output Decisions A company that has a monopoly on a particular product, such as a new drug, may find that increasing output lowers its marginal revenue.

Price Discrimination The previous example assumed that the monopolist must charge the same price to all consumers. But in some cases, the monopolist may be able to divide consumers into two or more groups and charge a different price to each group. This practice is known as price discrimination.

Price Discrimination Targeted Discounts Limits of Price Discrimination

Price Discrimination Analyze Charts Would a monopolist benefit from setting the same price for every person? Why or why not?

Price Discrimination Analyze Political Cartoons What is this political cartoon saying about the usefulness of price discrimination for airfares?

Price Discrimination Analyze Charts Why are distinct customer groups an essential component of price discrimination?

Quiz: Characteristics of a Monopoly What do all types of monopolies have in common? A. economies of scale B. a single seller that controls an entire market C. government action to ensure that prices don’t get too high D. a unique product to sell

Quiz: The Role of Government How does having a patent give a company a monopoly? A. A patent is a contract issued by a local authority that gives a single firm the right to sell its goods within an exclusive market. B. A patent gives firms the right to operate a business, especially where scarce resources are involved. C. A patent gives a company exclusive rights to sell a new good or service for a period of time. D. A patent allows the companies in an industry to restrict the number of firms in a market.

Quiz: Output Decisions What happens if a monopolist increases the price of a good? A. The monopolist will sell less. B. The monopolist will sell more. C. Sales will not change. D. Government intervention will be required.

Quiz: Price Discrimination Price discrimination can only work if A. a group of firms determines the highest maximum price. B. customers can resell the good for a lower price. C. prices are discounted by the age of the customer. D. firms have some control over the price.