Market Structures

Standard SSEM14 The student will explain the organization and role of business and analyze the four types of market structures in the U.S. economy. a. Compare and contrast three forms of business organization—sole proprietorship, partnership, and corporation. b. Explain the role of profit as an incentive for entrepreneurs. c. Identify the basic characteristics of monopoly, oligopoly, monopolistic competition, and pure competition.

When you think of market structures think……SHOPPing!

Shopping Think of the environment that you shop in: 1. Are many choices? 2. What are prices like? If they are high, why? 3. Can you find similar products? Is there only one product choice? 4. Do the producers try to gain your attention by using unique labeling, advertisements, Etc?

Vocab to know… Market power – ability to increase prices and people still buy it Barriers to entry – how difficult it is to enter the industry

Market Structure Features of a Market. Such as: Ease of entry into the market Can a new producer easily enter the market? Number of buyers/sellers Forms of competition Ex. advertising

Perfect Competition This market structure is not real. It is guided strictly by the laws of supply and demand. It is a theory that economist created to show what a true competitive market would look look like. Ranked #1 in competition.

Perfect Competition 1. Commodities (ID products) – only way to compete is with prices 2. Easy entry/exit Low barriers to entry 3. Many buyers and sellers – no monopolies can form 4. Consumers are well informed – we know what we are getting 5. No price control – no market power, all products alike so you can only compete with price Example: agricultural products Name your own example

Monopolistic Competition This is a REAL market structure. You shop in it regularly. It is based on differentiating your products to increase its uniqueness. Uniqueness= higher price that you can charge!

Monopolistic Competition 1.Similar products Differentiate So similar you can substitute 2.Easy entry/exit 3.Many buyers and sellers 4.Consumers are well informed 5.Some price control – some market power Since the products are differentiated, you can charge a little more because of its uniqueness. Example: cheeseburger fast food, shampoo

Can you name to product the slogan is representing? Just do it Push through the pain Because I’m worth it Like a good neighbor When you care enough to send the very best Be all that you can be Melts in your mouth, not your hands Turning dreams into reality I don’t want to grow up…. That was easy

answers Nike Tylenol L’Oreal State Farm Insurance Hallmark US army MM’s Citibank Toys R Us Staples

Name that logo….

Logo Levis Nestle HP Dreamworks Pantene Monster Hotwheels Lay’s

Watch theses http://www.youtube.com/watch?v=WKlHZ_mQ m34 http://www.youtube.com/watch?v=XXNrmDSq PPw How did they try to differentiate? Do you think their strategy will work?

Review Why does Perfect competition have identical products? Give an example of how a candy bar can be differentiated. How did Monopolistic competition get its name? Which market structure would you rather shop in?

Basketball Shoe You must have: 5 nonprice factors drawn and marked on your shoe Name your shoe Create a slogan Create a logo All of these must been on the front of your shoe. We will vote on these in class! The winner gets candy and a free homework pass!!

Monopolies The game monopoly and the economic term monopoly have something in common. What do you think it is?

Monopoly A monopoly is when one producer sells a good or service. Since he is the sole provider, he can charge whatever price he/she wants.

Monopoly 3 characteristics Sole producer (high market power) No close substitutes High barriers to entry

4 Types of monopoly Natural Monopoly – single producer that produces most efficiently b/c of the economies of scale. Example – power companies Geographic Monopoly – a monopoly due to location. Example – Disney World, the movie theater, Six Flags

4 Types of Monopolies Technological Monopoly – a producer is the only one with a certain technology or way of producing. Ex. Patent and copyright. Ex. Polaroid Camera Government Monopoly – the government is the sole producer of a product. Example – water company, 1st class mail

Review monopolies Legal barriers in place to prohibit a company from forming to compete against the government When competition is not practical When you dominate an area because having another competitor isn’t financially profitable Having legal protection

Oligopoly A market structure where there are only 3-5 producers that produce the good or service

Oligopoly Characteristics 3-5 producers Differentiated products High barriers to entry and high market power Interdependent Example – cereal industry Kelloog, Post, and General Mills American Cars – GM, Ford, Chrysler/Dodge

Oligopoly Oligopolies compete legally with price wars Differentiation of products

Oligopoly Illegal Oligopolies Illegal Oligopolies Cartel – openly announce they are a cartel. They TELL they are a cartel. They openly tell they are an Oligopoly that acts as one! Cartels openly set prices and production Ex. OPEC Collusion – secretly set prices and production. Both are illegal in the US because they set prices. Illegal Oligopolies Cartel – openly announce they are a cartel. They TELL they are a cartel. They openly tell they are an Oligopoly that acts as one! Cartels openly set prices and production Ex. OPEC Collusion – secretly set prices and production. Both are illegal in the US because they set prices.

Review oligopoly Assuming both are allowed in the US from a consumer point of view, how could a cartel (or collusion) benefit a consumer? How is an Oligopoly similar to a monopoly? How is an Oligopoly similar to monopolistic competition? Could an oligopoly form in a perfectly competitive market? Why?

Review - answer with a partner What is an advantage of buying a product from a monopoly? Disadvantage? Which of the four types of monopoly has economies of scale? Why? Name one way PC and MC are alike? Different? Why are cartels/collusions bad for consumers? Explain barriers to entry and market power with only a three word phrase. (3 word phrase for each) Why is Perfect Competition the most competitive market structure of all four?

Antitrust Acts If the government didn’t step in to regulate markets, do you think problems would arise? YES – that is why we have antitrust acts.

Antitrust Acts Antitrust acts were created to prevent big businesses from dominating a market and acting like a monopoly or trust. A trust is a group of companies that act like a monopoly. This is bad because it sets prices too high which is unfair to the consumer. Deregulation – reduce government regulation in markets. A reduction in government control.

3 Antitrust Acts to know Interstate Commerce Act – 1887 Regulated trade and did not allow price setting or price discrimination. Sherman Antitrust Act 1890 – prohibits any agreements, contracts, or conspiracies that would restrain trade – too vague – (1914)Clayton antitrust act strengthened the wording of Sherman. Clayton also legalized strikes and boycotts against companies. Federal Trade commission act 1914 – created the Federal Trade Commission (FTC) to investigate allegations of unfair methods of competition. It also approves of any mergers.

Writing assignment Write a paragraph about which of the three acts you consider to be the most important to our market based economic system. Include The name of the act and what it does (define) Two reasons it was created Three reasons you chose it over the others It must be a minimum of 6 sentences Use correct grammar and sentence structure.

Test prep Review previous learned material. Such as: Factors of production, circular flow, production possibilities curve, economic systems, supply and demand, types of business, etc. Take the practice test available on my website under the practice test questions heading. Review current material. Maybe explain all four market structures to your parents and see if they can pass my practice test after hearing your lesson!! 