perfect competition 7.1. objectives 1. describe the four conditions that are in place in a perfectly...
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PERFECT COMPETITION
7.1
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Objectives1. Describe the four conditions that are in
place in a perfectly competitive market.2. List two common barriers that prevent
firms from entering a market.3. Describe prices and output in a perfectly
competitive market.
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Perfect Competition- a market structure in which a large number of firms all produce the same product.
I. Four Conditions for Perfect Competition
A. Many Buyers and Sellers
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B. Identical Products- there are no differences between the products sold by different suppliers
i. Commodity- a product that is the same no matter who produces it, such as petroleum, notebook paper, or milk
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C. Informed Buyers and Sellers- know enough about the market to find the best deal
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D. Free Market Entry and Exiti. Firms must be able to enter markets
when they will make money and exit them when they will lose money
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II. Barriers to EntryImperfect Competition- a market structure that does not meet
the conditions of perfect competition
A. Start-Up Costs- the expenses a firm must pay before it can begin to produce and sell goods
B. Technologyi. Some markets require a high degree of
technological know how
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III. Price and OutputA. Efficiency is the primary
characteristic of perfect competitioni. Prices correctly represent the
opportunity cost of the productii. Prices are the lowest sustainable price
possible
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MONOPOLY
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Objectives1. Describe characteristics and give
examples of monopoly.2. Describe how monopolies are formed,
including government monopolies.3. Explain how a firm with a monopoly sets
output and price, and why companies practice price discrimination.
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I. Monopoly- a market dominated by a single seller
II. Forming a MonopolyA. Economies of Scale- factors that cause a
producer’s average cost per unit to fall as output rises
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i. 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
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B. Natural Monopolies- a market that runs most efficiently when one large firm supplies all of the output
i. Utilities
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C. Technology and Changei. Technology can cut fixed costs and make
small companies as efficient as one large firm
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III. Government MonopoliesA. Patents- license that gives the inventor of a
new product the exclusive right to sell it for a certain period of time
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B. Franchises and Licensesi. Franchise- the right to sell a good or
service within an exclusive marketii. License- a govt issued right to operate a
business
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C. Industrial Organizationsi. The govt allows MLB and other sports
organizations to restrict entry of teams
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IV. Output DecisionsA. The Monopoly’s Dilemma
i. Monopoly still limited by the demand curve for the product
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B.Falling Marginal Revenuei. Marginal revenue is lower than the price
when the firm can control the price and cut it to sell more
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V. Price DiscriminationA.Market power- the ability of a company to
change prices and output like a monopolist
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C. Targeted Discounts- Companies divide consumers into large groups and design pricing policies for each group
i. Rebatesii. Senior citizen and studentsiii. Free for children
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D. Limits of Price DiscriminationA. Some market powerB. Distinct customer groupsC. Difficult resale
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Monopolistic Competition
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Objectives1. Describe characteristics and give
examples of monopolistic competition.2. Explain how firms compete without
lowering prices.3. Understand how firms in a
monopolistically competitive market set output.
4. Describe characteristics and give examples of oligopoly.
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I. Monopolistic CompetitionA. a market structure in which many companies
sell products that are similar but not identical.
i. Examples: gas station, retail store
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II. Four Conditions of Monopolistic Competition
A. Many Firms- w/ a small investment, firms can begin to sell a product
B. Few artificial Barriers to entryC. Slight Control over priceD. Differentiated Products
i. differentiation
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III. Nonprice Competition- A way to attract customers through style, service, or location, but not a lower price
A. Physical Characteristics
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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
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D. Advertising, image, or statusi. Advertising creates more of a perceived difference
rather than a real one
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IV. Price, Output, and ProfitsA. Prices and output will be higher than in
perfectly comp. markets but lower than monopolies
B. Profit is kept down by competition w/ other firms and the ease of entry into the market
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V. Oligopoly- a market structure in which a few large firms dominate the market
A. Barriers to Entry
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B. Cooperation and Collusioni. 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
ii. Collusion- an agreement among firms to divide the market, set prices, or limit production1. Price fixing- agreement to charge one price for the same
good
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C. Cartels- a formal organization of producers that agree to coordinate prices and production