1. PERFECT COMPETITION
7.1

2. 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.

3. 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

4. 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

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

6. 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

7. 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

8. 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

9. MONOPOLY

10. 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.

11. 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

12. 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

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

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

15. 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

16. 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

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

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

19. 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.

20. 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

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

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

23. Monopolistic Competition

24. 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.

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

26. 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

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

28. 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

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

30. 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

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

32. 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

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