Chapter 7 Chapter 7 Market Structures SECTION 1 Perfet

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					Chapter 7
  Market Structures

     SECTION 1:
 Perfet Competition
           Perfect Competition
• A market in which a large
  number of firms
  (businesses) are all
  essentially the same
  product at the most
  similar price.
4 Conditions for Perfect Competition
• 1. Many buyers and
  sellers participate

• 2. Sellers offer “identical”

• 3. Buyers and sellers are
  well informed

• 4. Sellers able to enter
  and exit freely
     It’s the “price taker”…..
Company A


Company B


            How is this Perfect Competition?
• A product that is considered to be identical
  no matter who makes it or sells it.
        Hot Commodities….
Cub Foods




            Where would you choose to shop?
       Imperfect Competition….
• Barriers to entry can cause
  imperfect competition. If
  an entrepreneur
  encounters too many
  start-up costs, they may
  not be able to compete in
  the market.
                                  Business Time….
                                              •Please get with a partner and devise a detailed
                                              plan to open a “fictional” business.

                                              •Please write a list of ALL of your start-up costs.

                                              •You will tell the class what your business is and
                                              what the proposal is to START-UP your

                                              •Please include within your “start-up” proposal
                                              the cost to you as entrepreneurs/investors.

 Parachute Pants….good business decision???   •Please also lists possible “trade-offs” or
                                              alternative ways you can find money to
What is a Start-up cost Folks?                supplement your start-up costs.
Non-recurring costs associated with
        starting up a business.
Chapter 7
  Market Structures

SECTION 2: Monopolies
      When do they happen?
• Monopolies form when there is a barrier to
  entry within a given market that has a sole
                  PC vs. Monopoly
  Perfect Competive Market                 Monopoly
• Free entry and exit             • Barriers to entry—difficult

• No barriers                     • MANY buyers--ONE seller

• MANY buyers--MANY               • Ability to set whatever
  Sellers                           price and make consumers
                                    pay more.
• Attempt to stay within the
  “magic 5” to set market value
  and have a chance at making
  a profit.
          Natural Monopolies
• A market working
  most efficiently by
  using one firm to
  provide the buyers
  with the product.

• City water is the best
  example of a natural
          Government Monopolies…
• Patents: exclusive rights to sell a new good or
  service for a specified period of time.

• Franchises: a contract giving an authority to a
  single firm to sell within an exclusive market.

• Licenses: grant of permission to run/operate a
How could a consumer encounter
      a monopoly here??
       What is an economy of scale?
• Reduction of the unit cost as
  production increases and
  businesses produce goods and
  services more efficiently.

• Larger firms have the
  competitive advantage within
  an economy of scale

       Kramer and Karate
                    Setting Prices
• Monopolies set prices-
  assuming all consumers
  receive the same price.

• Price Discrimination: division
  of consumers into groups
  while charging different
 *Main assumption: each customer has
  his/her OWN price they will pay. *
    Price Discrimination and Market Power
• Although a firm may not      Bread, With my soup?
  be considered a
  monopoly if there is
  market power in play they
  have the ability to adjust
  and change their price

• Price Discrimination
  rarely if ever occurs in
  highly competitive
Chapter 7
  Market Structures

SECTION 3: Competition
   and Oligopolies
               Nonprice Competition
• Differentiating a good or service sets it apart
  from another firm offering a like product.

• By differentiating a product firms are setting
  competition through means other than
  price– “nonprice competition.”
    *Physical characteristics, location, service level, and advertising*
• An imperfect example of a
  monopoly, in which a few
  LARGE firms dominate a

• These firms may be
  competitive with one another
  but also at times work hand
  in hand to maintain the
  market power.
       “Respect of the Market”
• Collusion: the agreement among the large
  firms that dominate the market on how to set
  prices or limits to production.

• Being attentive to the “magic 5” allows/leads
  to price fixing.

• Price war:   - for business   + for consumers
• Formal organization of producers that agree
  to coordinating their prices and production

• Most well known example: drug cartels
  (working in unison)

• Businesses often do not form cartels simply because that
  would not be full participation in a competitive market.
  Also, it does not meet a common goal for any economic
Chapter 7
  Market Structures

SECTION 4: Regulation/
             Regulation vs. Deregulation
                                                  Deregulation: the removal of some
                                                  government controls over a market

                                                  Airline Deregulation Act of 1978:
                                                  The government “loosened the reins”
                                                  when it came to airline travel and pricing
                                                  and it allowed for more creativity for the
Regulation: governmental                          airlines which drove more choices for the
involvement that attempts to                      consumers and therefore ramped up
centrally plan the economy.                       COMPETITION.

Anti-Trust Laws: laws that strongly
encourage competition in the

Trust: similar to cartels, it is an illegal
group of companies that discourages
competition.                                  Has this Act continued to help or hinder the airline industry?
ChaptersDemand& 5
   Supply and
                                Supply and Demand
Choose a local business (or the business you opened during your proposal)
-   What good or service is produced?
-   How is this good or service produced?
-   What resources are needed to produce the good/service

1. Identify 5 factors/events that would affect the supply of goods/services your business
   produces. With each factor identified, indicate the possible affect on the price of the

2. Identify 5 factors/events that would affect the demand for goods/services produced.
   With each factor identified, indicate the possible affect on the price of the good/service.

3. Assume necessary resources to make your product becomes scarce, what could the
   producer do to adapt to this situation.

4. Due to the situation in #3 above, the final product of your business becomes scarce. List
   3 measures consumers may choose to address the problems resulting from scarcity.
         What is Supply and Demand?

• Supply: the amount of
  goods available.
Variables will have an effect on supply levels.

• Demand: the desire to
  own something and
  the ability to pay for it.
                       Law of Demand

PRICE: As prices
 go down……
                                       PRICE: As prices
                                         go up……

                                                          DEMAND: Quantity
                   DEMAND: Quantity                       demanded goes down
                    demanded goes up
Substitutes and Complimentary
              • Substitute: a good used
                I the place of another

              • Complimentary: two
                goods that are
                purchased and used
            Elastic vs. Inelastic
• If a scenario is elastic it will have a greater
  response to a situation.

• Inelasticity means little to no response for
  given scenario within supply and demand.

                        Income Effect
• The change in consumption resulting from a
            change in real income.

                                              YEAH! I can
                                               afford that!

  The concept of income effect, affects all
 income levels and is dependent upon the
amount of consumption from all of us, as
        Normal vs. Inferior goods
• Normal Good: a good     Inferior Good: a good
  that consumers have a   that consumers demand
  higher demand for       less as their income
  when their income       increases.
             Now Hiring….
• Marginal product of labor: the change in
  output from hiring one additional unit of

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