1. U2C7: Market Structures
Economics

2. 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.

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

4. 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

5. 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

6. 7.2 The Impact of Monopoly

7. 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

8. 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

9. 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)

10. 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.

11. 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

12. 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

13. 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

15. 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