U2C7: Market Structures Economics

Main Idea A market structure is an economic model that helps economists examine the nature and degree of competition among businesses in the same industry.

Essential Question How do economists use market structures to examine the competitiveness of an industry?

7.1 What is Perfect Competition? The Characteristics of Perfect Competition many buyers and sellers: large numbers of buyers and sellers is necessary so that no one buyer or seller has the power to control the price of the market standardized product: products are perfect substitutes freedom to enter and exit markets: producers enter market when profitable and exit when unprofitable independent buyers and sellers: neither buyers nor sellers join together to influence price well-informed buyers and sellers: both buyers and sellers know the market prices and other conditions

Imperfect Competition there are no perfectly competitive markets-real markets do not have all the characteristics of perfect competition; lacking one condition is imperfect competition example 1: corn-(a similar product) subsidies and group action interfere with the market forces of supply and demand, so a set market price in agreed upon example 2: beef-(a similar product) set market prices prevent group actions of buyers and sellers

7.2 The Impact of Monopoly

Characteristics of a Monopoly one seller restricted market control of prices a single business controls the supply of a product that has no close substitutes government regulations or other barriers to entry keep other firms out of the market monopolies act as price makers because they sell products that have no close substitutes and they face no competition

costs are most efficient with one supplier Types of Monopolies one seller restricted market control of prices natural monopoly (A Water Company) costs are most efficient with one supplier economies of scale limit the number of firms prices subject to government regulation government monopoly (The Postal Service) government runs the business or licenses one supplier market entry limited by government control or regulation prices determined by government regulation technological monopoly (Polaroid) results from ownership of an invention or technology patents serve as barriers to entry charges higher prices while the monopoly lasts geographic monopoly (Professional Sports) no competition in the local area location or size of market limits number of suppliers charges higher prices due to lack of competition

Profit Maximization the monopolist controls price by controlling supply by producing less of a product than would be supplied in a competitive market, they artificially raise the equilibrium price limited monopolies only last for the life of the patent, or until a competitor develops a similar product (drug manufacturer)

7.3 Other Market Structures Monopolistic Competition: Most markets fall somewhere between perfect competition and monopoly. Monopolistic competition, one of the most common market structures in one in which many sellers offer similar, but not standardized, products. Example: T-shirt companies-pink fuzzy kitten shirt vs. black monster truck. Oligopoly: market structure in which only a few sellers offer a similar product. It is less competitive than monopolistic competition, and a few large firms have a large market share. Example: movie studios-few firms due to high start up costs.

Monopolistic Competition vs. Oligopoly Many buyers and many sellers Similar but differentiated products Limited control of prices Freedom to enter or exit market Few sellers and many buyers Standardized or differentiated products More control of prices Little freedom to enter or exit market

Comparing Market Structures # of sellers Type of Product Sellers’ Control over Prices Barriers to Enter or Exit Market Perfect Competition Many Standardized None Few Monopolistic Competition Similar but differentiated Many Limited Few Standardized for industry; differentiated for consumers Oligopoly Few Some Many Very many-market restricted or regulated Standardized, but no close substitutes Monopoly One Significant

7.4 Regulation and Deregulation Today Promoting Competition Ensuring a Level Playing Field Protecting Consumers Deregulating Industries Antitrust legislation gives the government the power to break up monopolies and prevent new monopolies from forming The government also tries to prevent business practices that reduce competition Many government agencies protect consumers from the effects of unscrupulous businesses Deregulation opens up industries to increased competition, which leads to lower prices for consumers

Federal Consumer Protection Agencies Agency Created Purpose Food and Drug Administration (FDA) 1906 Protects consumers from unsafe foods, drugs, or cosmetics; requires truth in labeling of these products Federal Trade Commission (FTC) 1914 Enforces antitrust laws and monitors unfair business practices, including deceptive advertising Federal Communications Commission (FCC) 1934 Regulates the communications industry, including radio, television, cable, and telephone services Securities and Exchange Commission (SEC) 1934 Regulates the market for stocks and bonds to protect investors Environmental Protection Agency (EPA) 1970 Protects human health by enforcing environmental laws regarding pollution and hazardous materials Consumer Product Safety Commission (CPSC) 1972 Sets safety standards for thousands of types of consumer products; issues recalls for unsafe products