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Economics Chapter 7 Section 2

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1 Economics Chapter 7 Section 2

2 MONOpoly Monopoly—a market in which there is one seller but any number of buyers. (mono—one seller) A monopoly forms when barriers prevent firms from entering a market that has a single supplier. Examples of ways a monopoly can form: Patent (legal) Predatory pricing (illegal) know what predatory pricing MEANS.

3 Monopolies are bad—Why?
Please take a guess and write down why monopolies are bad for the CONSUMER. They’re “bad” for consumers b/c the monopolist can raise prices and lower customer service. Because there’s no competition. COMPETITION is good for consumers What industry has lots of competition? Are the products of decent quality?

4 How do Monopolies Form? An industry in which Economies of Scale are present EOS exist when the cost to produce 1 product goes down as production goes up. (The more you make, the less it costs to make each one). TOTAL COST does NOT go down. The cost PER UNIT of production goes down. (page 157) When EXTREME economies of scale are present in an industry there’s only room for one supplier and the government may mandate that.

5 How do Monopolies Form? Natural Monopoly
NM—a market that runs most efficiently with only one large supplier. There is no room for another supplier because: Another supplier would provide competition Drive down the market price Decrease the quantity supplied by both firms One or both firms will not be able to cover their costs Either far less supply or no supply of good Public water company: dig diff’t reservoirs, lay additional pipe. Competition brings no benefit to consumer Government steps in and ALLOWS the NM however regulates the price charged to consumers

6 How do Monopolies Form? (cont.) Government Monopolies
Issuing a patent Patents are issued by the government to a company. The patent gives the company the EXCLUSIVE rights to sell a product or service for a specific amount of time. Why issue patents? Exclusive production and selling rights gives companies a PM to spend huge amounts of money on R&D to develop new products. Ex. Medicine (Costs about $1 BILLION to bring a new drug to the market place) Effectively creates a monopoly because that company is the only company that can sell that product.

7 Franchises and Licenses
Franchise—contract issued by a local authority giving a single firm the exclusive right to sell its goods within a market Example—Food service within a national park Monopolist’s dilemma How much to charge? Charge too much and people will find substitutes and/or not buy product. Charge too little and lose potential profit.

8 Technology as Monopoly Buster
Natural monopolies can exist because of fixed costs Innovation can cut fixed costs Telephone companies used to install copper wire. Local telephone service was a natural monopoly ‘80s and ‘90s saw advent of cell phones. Much cheaper to install a few cell towers than install copper wire to each home Cell phone companies are as efficient if not more so

9 Chapter 7.3 Cartel—an organization of producers that agree to coordinate price and supply. Illegal in the US, legal in other countries. Organization of Petroleum Exporting Countries (OPEC) Iraq Libya Nigeria Saudi Arabia United Arab Emirates Venezuela They set the amount of oil they will pump, and therefore the price. Oil embargo of ’70s. Brought far less supply of oil, higher oil prices, higher gas prices, long lines at gas stations and SHORTAGES.

10 Oligopoly—small number of firms dominate an industry.
Breakfast cereal, soda companies, airlines Oligopolies form when there are barriers to entry Economies of scale is an example of a barrier to enter the marketplace Oligopolies can engage in collusion—agreement to set prices and output. Collusion is HIGHLY ILLEGAL Why? It inhibits ________________________.

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