7-1: perfect competition - ms. lopiccolo's website
Post on 17-Jan-2022
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LEARNING TARGETS
• 1. I WILL DEMONSTRATE MY UNDERSTANDING
OF THE CHARACTERISTICS OF PERFECT
COMPETITION AND MONOPOLIES.
MARKET STRUCTURES
• MARKET STRUCTURE: AN ECONOMIC MODEL
OF COMPETITION AMONG BUSINESSES IN THE
SAME INDUSTRY
MARKET STRUCTURES• ECONOMISTS CLASSIFY MARKETS BASED ON SEVERAL
FACTORS:
• THE NUMBER OF PRODUCERS: THIS HELPS DETERMINE
THE LEVEL OF COMPETITION; MORE PRODUCERS
MEANS A MARKET IS MORE COMPETITIVE
• THE SIMILARITY OF PRODUCTS: THE MORE SIMILAR
THE PRODUCT, THE MORE COMPETITION THAT EXISTS
MARKET STRUCTURES
• THE EASE OF ENTRY: HOW EASY IS IT TO ENTER
A PARTICULAR INDUSTRY AND START A NEW
BUSINESS
• CONTROL OVER PRICES: THE MORE
COMPETITIVE THE MARKET IS, THE LESS
CONTROL OVER PRICES PRODUCERS WILL HAVE
PERFECT COMPETITION
• THE MOST COMPETITIVE MARKET STRUCTURE IS
PERFECT COMPETITION
• IN THIS MARKET STRUCTURE, FIRMS
ESSENTIALLY PRODUCE THE SAME PRODUCT
• ALL GOODS ARE SOLD AT
EQUILIBRIUM PRICE OR
MARKET PRICE
• IN THE REAL WORLD, THIS
MARKET STRUCTURE IS
RARE
• EXAMPLES: THE
WHEAT, CORN,
TOMATO, AND MILK
INDUSTRIES
CHARACTERISTICS OF PERFECT COMPETITION
• 1. NUMEROUS BUYERS AND
SELLERS
• NO SINGLE BUYER OR SELLER
HAS THE POWER TO CONTROL
THE PRICE IN THE MARKET
• BUYERS HAVE LOTS OF
OPTIONS
• SELLERS ARE ABLE TO SELL
THEIR PRODUCTS AT
MARKET PRICE
CHARACTERISTICS OF PERFECT COMPETITION
• 2. STANDARDIZED/IDENTICAL PRODUCT
• A PRODUCT THAT CONSUMERS SEE AS IDENTICAL
REGARDLESS OF THE PRODUCER
CHARACTERISTICS OF PERFECT COMPETITION
• 3. FREEDOM TO ENTER AND EXIT THE MARKET
• PRODUCERS FACE FEW RESTRICTIONS IN
ENTERING THE MARKET
• ALL FIRMS FACE COMPETITION AND NO
SINGLE FIRM CAN DOMINATE THE MARKET
CHARACTERISTICS OF PERFECT COMPETITION
• 4. PRODUCERS HAVE NO CONTROL OVER PRICES
• THEY ARE PRICE TAKERS BECAUSE THEY MUST
ACCEPT THE MARKET PRICE FOR THEIR GOOD
• IF A PRODUCER TRIES TO SELL A GOOD OVER
MARKET PRICE, HE/SHE WILL NOT SELL ANY
UNITS
CHARACTERISTICS OF PERFECT COMPETITION
• 5. EASY ACCESS TO INFORMATION ABOUT
PRODUCTS AND PRICES
• BUYERS COMPARE PRICES
• PRODUCERS KNOW WHAT CONSUMERS ARE
WILLING TO PAY FOR GOODS
IMPERFECT COMPETITION
• ECONOMISTS DEFINE IMPERFECT COMPETITION AS
ANY MARKET STRUCTURE IN WHICH PRODUCERS HAVE
SOME CONTROL OVER THE PRICE OF THEIR PRODUCTS
• THE MOST EXTREME VERSION OF IMPERFECT
COMPETITION IS A MONOPOLY
CHARACTERISTICS OF MONOPOLIES
• 1. ONE PRODUCER: THERE IS NO COMPETITION IN A
MONOPOLY
• 2. UNIQUE PRODUCT: GENERALLY, IT IS THE ONLY
PRODUCT OF ITS KIND
• THERE ARE NO SUBSTITUTES AND NO OTHER
PRODUCERS PROVIDE SIMILAR GOODS OR SERVICES
CHARACTERISTICS OF MONOPOLIES
• 3. HIGH BARRIERS TO ENTRY: PREVENTS OTHER
FIRMS FROM TRYING TO ENTER THE MARKET
• 4. SUBSTANTIAL CONTROL OVER PRICE:
MONOPOLIES ARE PRICE MAKERS SINCE THEY
CONTROL THE SUPPLY OF A GOOD
MONOPOLIES
• A PURE MONOPOLY IS RARE
IN TODAY’S ECONOMY
• HISTORICALLY, STANDARD OIL
IS AN EXAMPLE OF A
MONOPOLY
• WITH THE DEVELOPMENT
OF ANTI-TRUST LAWS THE
COMPANY WAS LATER
BROKEN UP
MONOPOLIES
• THERE ARE ALSO LEGAL MONOPOLIES THAT THE
GOVERNMENT ALLOWS TO EXIST UNDER CERTAIN
CIRCUMSTANCES
• GOVERNMENT MONOPOLY: EXISTS BECAUSE THE
GOVERNMENT EITHER OWNS AND RUNS THE
BUSINESS OR AUTHORIZES ONLY ONE PRODUCER
• EXAMPLE: U.S. POSTAL SERVICE
MONOPOLIES
• NATURAL MONOPOLY: WHEN A SINGLE FIRM
CAN SUPPLY A GOOD OR SERVICE MORE
EFFICIENTLY AND AT A LOWER COST THAN
TWO MORE COMPETING FIRMS CAN
• EXAMPLE: PUBLIC UTILITIES: GAS, WATER,
CABLE, AND ELECTRICITY
MONOPOLIES
• A NATURAL MONOPOLY OCCURS WHEN A
PRODUCER CAN TAKE ADVANTAGE OF
ECONOMIES OF SCALE TO DOMINATE A MARKET
• ECONOMIES OF SCALE MEANS THAT A FIRM
DECREASES ITS COSTS OF PRODUCTION AS IT
INCREASES ITS OUTPUT
MONOPOLIES
• GEOGRAPHIC MONOPOLY: EXISTS WHEN
THERE ARE NO OTHER PRODUCERS WITHIN A
CERTAIN REGION
• EXAMPLE: A GENERAL STORE IN A SMALL
TOWN (HAVING MORE THAN ONE STORE
WOULD MAKE MULTIPLE STORES LOSE
MONEY)
MONOPOLIES
• TECHNOLOGICAL MONOPOLY: WHEN A FIRM
CONTROLS A MANUFACTURING METHOD, AN
INVENTION, OR A TYPE OF TECHNOLOGY
• THE FIRM MIGHT HAVE A PATENT: EXCLUSIVE RIGHTS
TO THAT INVENTION OR PROCESS FOR A CERTAIN
NUMBER OF YEARS
• EXAMPLE: PRESCRIPTION DRUGS
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