• A market in which a large
number of firms
(businesses) are all
essentially the same
product at the most
4 Conditions for Perfect Competition
• 1. Many buyers and
• 2. Sellers offer “identical”
• 3. Buyers and sellers are
• 4. Sellers able to enter
and exit freely
It’s the “price taker”…..
How is this Perfect Competition?
• A product that is considered to be identical
no matter who makes it or sells it.
Where would you choose to shop?
• Barriers to entry can cause
imperfect competition. If
encounters too many
start-up costs, they may
not be able to compete in
•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.
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
• Attempt to stay within the
“magic 5” to set market value
and have a chance at making
• 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
• 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
• 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
SECTION 3: 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
“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
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?
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
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
PRICE: As prices
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.
• The change in consumption resulting from a
change in real income.
YEAH! I can
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.
• Marginal product of labor: the change in
output from hiring one additional unit of
ENJOY….STUDY for the TEST!!