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Chapter Menu
Chapter Introduction
Section 1: Competition and Market Structures
Section 2: Market Failures
Section 3: The Role of Government
Visual Summary
Chapter Intro 1
A developer has acquired the large piece of vacant land across the street from your house and plans to build a large shopping mall on the property. How might you benefit from the mall? How might it negatively impact your life? Read Chapter 7 to learn about market structures and economic growth.
Chapter Intro 2
1. The profit motive acts as an incentive for people to produce and sell goods and services.
2. Economists look at a variety of factors to assess the growth and performance of a nation’s economy.
3. Governments strive for a balance between the costs and benefits of their economic policies to promote economic stability and growth.
Section 1-Preview
Section Preview
In this section, you will learn that market structures include perfect competition, monopolistic competition, oligopoly, and monopoly.
Section 1-Key Terms
Content Vocabulary
• laissez-faire
• market structure
• perfect competition
• imperfect competition
• monopolistic competition
• product differentiation
• nonprice competition
• oligopoly
• collusion
• price-fixing
• monopoly
• natural monopoly
• economies of scale
• geographic monopoly
• technological monopoly
• government monopoly
A. A
B. B
C. C
Section 1
What is the incentive for people to produce and sell goods and services?
A. Competition
B. Profit motive
C. Can make a better product
A B C
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Section 1
Competition and Market Structures
• In 1776, the average factory was small and businesses were competitive. Laissez-faire was the economic philosophy.
• The supply side of the market today has many firms of different sizes producing slightly different products.
• These conditions help determine market structure.
Section 1
• Economists group businesses into four market structures.
Competition and Market Structures (cont.)
Section 1
Perfect Competition
Perfect competition is an ideal market situation used to evaluate other market structures.
Section 1
• Perfect competition—a theoretical ideal used to evaluate other market structures
Perfect Competition (cont.)
Perfect Competition and Profit Maximization
Section 1
• Perfect competition has five necessary conditions:
Perfect Competition (cont.)
1. There is a large number of buyers and sellers.
2. Buyers and sellers deal in identical products.
3. Each buyer and seller acts independently.
4. Buyers and sellers are well informed about prices and products.
5. Buyers and sellers are free to enter, conduct, and shut down.
Section 1
• Market supply and demand set the product’s equilibrium price.
• Few perfectly competitive markets exist.
Perfect Competition (cont.)
Section 1
• Imperfect competition results in
– Less competition
– Higher prices for consumers
– Fewer products offered
Perfect Competition (cont.)
A. A
B. B
C. C
D. D
Section 1
A B C D
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Why do so few perfectly competitive markets exist?
A. Prices offered are too high for consumers.
B. Difficult to satisfy all five necessary conditions
C. Overhead costs are too high to make it work.
D. Too competitive to be successful
Section 1
Monopolistic Competition
Monopolistic competition shares all the conditions of perfect competition except the same goods or services.
Section 1
• Under monopolistic competition, products are similar.
• Monopolistic—seller’s ability to raise the price within a narrow range
• Competitive—If sellers raise or lower the price enough, customers will ignore minor differences and change brands.
Monopolistic Competition (cont.)
Section 1
• Monopolistic competition is characterized by product differentiation.
• This is done through nonprice competition.
Monopolistic Competition (cont.)
A. A
B. B
C. C
Section 1
Are designer labels really better than store brand names when it comes to shoes, clothing, or makeup?
A. Absolutely
B. Sometimes
C. Never
A B C
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Section 1
Oligopoly
Oligopoly describes a market in which a few sellers dominate an industry.
Section 1
• Oligopoly products may have distinct features like makes and models in the auto industry; or products that can be standardized as in the steel industry.
Oligopoly (cont.)
Section 1
• Because oligopolies are so large, when one firm lowers its price or introduces a new product, other firms follow.
• This interdependent behavior takes the form of collusion.
Oligopoly (cont.)
– Price-fixing
– Collusion restrains trade and is against the law.
A. A
B. B
C. C
D. D
Section 1
A B C D
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What are the ramifications of collusion?
A. All firms within an industrybenefit.
B. Against the law
C. Leads to lower prices for the consumer
D. Several of the above answers are true.
Section 1
Monopoly
A monopoly is a market with only one seller for a particular product.
Section 1
• Monopoly is at the opposite end of the spectrum from perfect competition.
Monopoly (cont.)
• Few real monopolies exist today.
– Americans dislike them.
– New technologies compete with existing monopolies.
Characteristics of Market Structures
Section 1
• Types of monopolies
Monopoly (cont.)
– Natural monopoly
• Government gives a public utility a franchise.
• Economies of scale
Section 1
• Types of monopolies
Monopoly (cont.)
– Geographic monopoly
– Technological monopoly—Government grants a patent or copyright.
– Government monopoly
Profiles in Economics:Bill Gates
A. A
B. B
C. C
Section 1
Compared to an oligopoly industry, what kind of prices do consumers in a monopoly pay?
A. Higher
B. Lower
C. The same
A B C
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Section 2-Preview
Section Preview
In this section, you will find out that inadequate competition, inadequate information, immobile resources, public goods, and externalities can lead to market failures.
Section 2-Key Terms
Content Vocabulary
• market failure
• public goods
• externality
• negative externality
Academic Vocabulary
• collude • sustain
• positive externality
A. A
B. B
C. C
Section 2
Are you familiar with any businesses today that may engage in price-fixing?
A. Yes
B. No
C. Maybe
A B C
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Section 2
Types of Market Failures
Markets can sometimes fail because of inadequate competition, inadequate information, resource immobility, public goods, and externalities.
Section 2
Types of Market Failures (cont.)
• Five main causes of market failure
– Inadequate competition
– Inadequate information
– Resource immobility
– Public goods
Section 2
Types of Market Failures (cont.)
• Five main causes of market failure
– Externalities
• Negative externality
• Positive externality
A. A
B. B
C. C
Section 2
How does inadequate information lead to market failure?
A. Profits spent on executives
B. Positive externalities result
C. Slow drain on the economy
A B C
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Section 2
Dealing with Externalities
Externalities indicate a market failure and can be corrected with government action.
Section 2
• Externalities distort decisions made by consumers and producers, resulting in a less efficient economy.
Dealing with Externalities (cont.)
Section 2
• Correcting negative externalities
Dealing with Externalities (cont.)
– Government adds a tax onto products sold by the firm.
– Firms have less incentive because the tax increases their product’s price.
– Higher prices reduce quantity demanded.
– People affected may face fewer problems.
Section 2
• Correcting positive externalities
Dealing with Externalities (cont.)
– Subsidizing local programs, such as education, helps communities.
– Programs are expensive and many are left underfunded.
A. A
B. B
C. C
Section 2
Do you think a fully paid educational program for all citizens, from preschool through college, would make communities substantially better than they are?
A. Absolutely
B. May not change the community much
C. Won’t change the community at all
A B C
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Section 3-Preview
Section Preview
In this section, you will learn that one of the economic functions of government in a market economy is to maintain competition.
Section 3-Key Terms
Content Vocabulary
• trust
• price discrimination
• cease and desist order
Academic Vocabulary
• restrained • intervention
• public disclosure
A. A
B. B
Section 3
Have you or your family ever had a product you purchased recalled?
A. Yes
B. No
A B
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Section 3
Maintain Competition
The government exercises its power to maintain competition within markets.
Section 3
Maintain Competition (cont.)
• Two ways government maintains competitive markets
– Prohibiting market structures that are not competitive
– Regulating markets where full competition is not possible
Section 3
Maintain Competition (cont.)
• Laws have historically been passed to restrict monopolies and trusts.
– Congress passed the Sherman Antitrust Act in 1890.
– Clayton Antitrust Act in 1914 outlawed price discrimination.
Anti-Monopoly Legislation
Section 3
Maintain Competition (cont.)
• Laws have historically been passed to restrict monopolies and trusts.
– Federal Trade Commission Act gave authority to issue a cease and desist order.
Anti-Monopoly Legislation
Section 3
Maintain Competition (cont.)
• Natural monopolies are not necessarily bad and therefore should not be broken up.
• Many monopolies are regulated by government agencies.
Federal Regulatory Agencies
A. A
B. B
C. C
Section 3
Which governmental agency oversees our air and water?
A. Federal Trade Commission
B. Environmental Protection Agency
C. Food and Drug Administration
A B C
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Section 3
Improve Economic Efficiency
Providing public goods and promoting transparency can improve economic efficiency.
Section 3
• Efficient and competitive markets need adequate and transparent information.
• Therefore, public disclosure is paramount to economic efficiency.
Improve Economic Efficiency (cont.)
Section 3
• Truth-in-advertising laws
• Consumer lending laws
• Securities and Exchange Commission
• Government documents, studies, and reports are available in public libraries.
Improve Economic Efficiency (cont.)
Section 3
• Government provides many public goods because a free economy does not promote them.
• Public goods, like decent roads and highways, make the economy more productive.
• Firms need an educated workforce.
Improve Economic Efficiency (cont.)
A. A
B. B
C. C
D. D
Section 3
A B C D
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Why is public disclosure so important to consumers?
A. Protects workers
B. Protects retirement and stock investments
C. Promotes safe products and services
D. All of the above
Section 3
Modified Free Enterprise
Because the government is involved in certain aspects of our economy, it is a modified version of free enterprise.
Section 3
• A modified free enterprise economy is a result of the U.S. economy evolving over time.
• Government has a responsibility to protect the rights of workers and protect consumers from false claims, harmful products, and price gouging.
Modified Free Enterprise (cont.)
Section 3
• Now government concerns are focused on promoting economic efficiency by supplying public goods and promoting transparency.
Modified Free Enterprise (cont.)
A. A
B. B
C. C
D. D
Section 3
A B C D
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Is government intervening enough when it comes to identity theft, which has become so rampant today?
A. More work needs to be done by the government.
B. More work needs to be done by the private sector instead of the government.
C. Both the public and private sectors need to help curtail this problem.
D. There is no problem and therefore nothing needs to be done.
Market Structures We can differentiate among four different market structures. One is called perfect competition; the other three are different kinds of imperfect competition.
VS 1
VS 2
Market Failures When one of the conditions necessary for competitive markets does not exist, market failures can occur. Markets usually fail because of one of five factors.
VS 3
Government Roles In order to carry out its legal and social obligations, the government can encourage competition and regulate monopolies.
Figure 1
Figure 2
Figure 3
Figure 4
Profile
Bill Gates (1955– )
• co-founder and chairman of Microsoft Corporation
• ranked the richest man in the world for 12 years in a row
Concept Trans Menu
Economic Concepts Transparencies
Transparency 9 Competition and Market Structure
Transparency 11 Market Failures
Transparency 12 The Role of the Government
Select a transparency to view.
Concepts Trans 1
Concepts Trans 2
Concepts Trans 3
DFS Trans 1
DFS Trans 2
DFS Trans 3
Vocab1
laissez-faire
philosophy that government should not interfere with business activities
Vocab2
market structure
nature and degree of competition among firms in the same industry
Vocab3
perfect competition
market structure with many well-informed and independent buyers and sellers who exchange identical products
Vocab4
imperfect competition
market structure that does not meet all conditions of perfect competition
Vocab5
monopolistic competition
market structure that meets all conditions of perfect competition except identical products
Vocab6
product differentiation
real or imagined differences between competing products in the same industry
Vocab7
nonprice competition
sales strategy focusing on a product’s appearance, quality, or design rather than its price
Vocab8
oligopoly
market structure in which a few large sellers dominate the industry
Vocab9
collusion
agreement, usually illegal, among producers to fix prices, limit output, or divide markets
Vocab10
price-fixing
agreement, usually illegal, by firms to charge the same price for a product
Vocab11
monopoly
market structure with a single seller of a particular product
Vocab12
natural monopoly
market structure where average costs of production are lowest when a single firm exists
Vocab13
economies of scale
situation in which the average cost of production falls as a firm gets larger
Vocab14
geographic monopoly
market structure in which one firm has a monopoly in a geographic area
Vocab15
technological monopoly
monopoly based on a firm’s ownership or control of a production method, process, or other scientific advance
Vocab16
government monopoly
a monopoly owned and operated by the government
Vocab17
theoretically
existing only in theory; not practical
Vocab18
equate
to represent as equal or equivalent
Vocab19
market failure
condition that causes a competitive market to fail
Vocab20
public goods
goods or services whose benefits are available to everyone and are paid for collectively
Vocab21
externality
economic side effect that affects an uninvolved third party
Vocab22
negative externality
harmful side effect that affects an uninvolved third party
Vocab23
positive externality
beneficial side effect that affects an uninvolved third party
Vocab24
collude
to act together in secret, especially with harmful or illegal intent
Vocab25
sustain
to support or hold up
Vocab26
trust
illegal combination of corporations or companies organized to hinder competition
Vocab27
price discrimination
practice of selling the same product at different prices to different buyers
Vocab28
cease and desist order
ruling requiring a company to stop an unfair business practice that reduces or limits competition
Vocab29
public disclosure
requirement that a business reveal information about its products or its operations to the public
Vocab30
restrained
limited the activity or growth of
Vocab31
intervention
involvement in a situation to alter the outcome
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