PERFECT COMPETITION 7.1

Objectives Describe the four conditions that are in place in a perfectly competitive market. List two common barriers that prevent firms from entering a market. Describe prices and output in a perfectly competitive market.

Four Conditions for Perfect Competition Perfect Competition- a market structure in which a large number of firms all produce the same product. Four Conditions for Perfect Competition Many Buyers and Sellers

B. Identical Products- there are no differences between the products sold by different suppliers Commodity- a product that is the same no matter who produces it, such as petroleum, notebook paper, or milk

C. Informed Buyers and Sellers- know enough about the market to find the best deal

D. Free Market Entry and Exit Firms must be able to enter markets when they will make money and exit them when they will lose money

II. Barriers to Entry Imperfect Competition- a market structure that does not meet the conditions of perfect competition Start-Up Costs- the expenses a firm must pay before it can begin to produce and sell goods B. Technology Some markets require a high degree of technological know how

III. Price and Output Efficiency is the primary characteristic of perfect competition Prices correctly represent the opportunity cost of the product Prices are the lowest sustainable price possible

MONOPOLY

Objectives Describe characteristics and give examples of monopoly. Describe how monopolies are formed, including government monopolies. Explain how a firm with a monopoly sets output and price, and why companies practice price discrimination.

Monopoly- a market dominated by a single seller II. Forming a Monopoly Economies of Scale- factors that cause a producer’s average cost per unit to fall as output rises

Limited economies of scale- output will eventually rise as production rises ii. An industry that enjoys economies of scale can easily become a natural monopoly

B. Natural Monopolies- a market that runs most efficiently when one large firm supplies all of the output Utilities

C. Technology and Change Technology can cut fixed costs and make small companies as efficient as one large firm

III. Government Monopolies Patents- license that gives the inventor of a new product the exclusive right to sell it for a certain period of time

B. Franchises and Licenses Franchise- the right to sell a good or service within an exclusive market License- a govt issued right to operate a business

C. Industrial Organizations The govt allows MLB and other sports organizations to restrict entry of teams

IV. Output Decisions The Monopoly’s Dilemma i. Monopoly still limited by the demand curve for the product

B.Falling Marginal Revenue i. Marginal revenue is lower than the price when the firm can control the price and cut it to sell more At $12 a dose, consumers buy 8,000 doses providing $96K in revenue. If the price is lowered to $11 a dose, 9,000 doses are sold for a total of $99k. For perfect competition, the price cannot be changed by the firm b/c it is determined by everyone put together, so the the marginal revenue was always the same as price. For monopolies, they can change the price as they see fit. By changing the price from $12 to $11, the company sold 1000 more units and brought in $3k more. That makes the marginal cost $3 per dose, well below $11.

V. Price Discrimination A.Market power- the ability of a company to change prices and output like a monopolist Price discrimination is a feature of a monopolist, but any company with market power can also practice price discrimination

C. Targeted Discounts- Companies divide consumers into large groups and design pricing policies for each group Rebates Senior citizen and students Free for children

D. Limits of Price Discrimination Some market power Distinct customer groups Difficult resale

Monopolistic Competition

Objectives Describe characteristics and give examples of monopolistic competition. Explain how firms compete without lowering prices. Understand how firms in a monopolistically competitive market set output. Describe characteristics and give examples of oligopoly.

Monopolistic Competition a market structure in which many companies sell products that are similar but not identical. Examples: gas station, retail store

II. Four Conditions of Monopolistic Competition Many Firms- w/ a small investment, firms can begin to sell a product Few artificial Barriers to entry Slight Control over price Differentiated Products differentiation

III. Nonprice Competition- A way to attract customers through style, service, or location, but not a lower price A. Physical Characteristics

B. Location- some goods can be differentiated by where they are sold C. Service Level- higher prices can be charged if a firm offers a high level of service

D. Advertising, image, or status i. Advertising creates more of a perceived difference rather than a real one

IV. Price, Output, and Profits Prices and output will be higher than in perfectly comp. markets but lower than monopolies Profit is kept down by competition w/ other firms and the ease of entry into the market

V. Oligopoly- a market structure in which a few large firms dominate the market Barriers to Entry

B. Cooperation and Collusion Price Leadership- w/o actually ‘cooperating’ to raise prices, firms will make it well known that they are going to raise prices and hope that others do as well Collusion- an agreement among firms to divide the market, set prices, or limit production 1. Price fixing- agreement to charge one price for the same good

C. Cartels- a formal organization of producers that agree to coordinate prices and production