Chapter 7:1 Market Structure:

• WHAT: Explain the four conditions that are in place in a perfectly competitive market.

• WHAT: Examine the common barriers for firms to enter the market.

• WHAT: Examine prices and output in a perfectly competitive market.

• WHY: ECN.4.2 Demonstrate understanding of basic concepts (Market Structure)

• “He keepeth the paths of

judgment, and preserveth

the way of his saints.

Then shalt thou

understand

righteousness, and

judgment, and equity; yea,

every good path.”

Proverbs 2:8-9

Perfect Competition:

• Is called pure competition; the

simplest market structure.

• A perfectly competitive market is

one with a large number of firms all

producing essentially the same

product.

• It assumes that the market is in

equilibrium and that all firms sell the

same product for the same price.

Identical Products: • A product that is considered the

same regardless of who makes or sells it is called a commodity.

• Examples include low-grade gasoline, notebook paper, sugar.

• Identical products are a key to perfect competition for one reason: the buyer will not pay extra for one particular company’s goods.

• The buyer will always choose the supplier with the lowest price.

Four Conditions for Perfect Competition:

(1) Many buyers and sellers

participate in the market

(2) Sellers offer identical products.

(3) Buyers and sellers are well

informed about products.

(4) Sellers are able to enter and

exit the market freely.

Activity:

o Take 5 pictures of identical products from your Ipad or smart phone and copy and paste it in a word document. You can find these items in a store, your home, or on campus. Explain why they are identical products for perfect competition for each picture and turn it in on Showbie.

Informed Buyers and Sellers:

• In most markets, a buyer’s willingness to find information about prices, and availability represents a trade-off.

• The time spent gathering information must be worth the amount of money that will be saved.

• For example, most buyers would not search online to visit a dozen convenience stores to save five cents on a pack of chewing gum.

Barriers to Entry:

o Factors that make it difficult for new firms to enter a market are called barriers to entry.

o Barriers to entry can lead to imperfect competition, a market structure that fails to meet the conditions of perfect competition.

o Common barriers to entry include start-up costs and technology.

Activity:

o Get in groups and formulate a skit on

what is barriers to entry.

Discussion Question:

o What are examples of businesses or industries that have strong barriers of entry that make it difficult for anyone to enter that business or industry? (List three and explain why they are examples of barriers of entry).

o Do you think Barriers to Entry is positive or negative to society?

Chapter 7:2 Forming Monopolies:

• WHAT: Describe characteristics and give examples of a monopoly.

• WHAT: Describes how monopolies are formed.

• WHAT: Explain how a firm with a monopoly makes output decisions and why monopolists sometimes practice price discrimination.

• WHY: ECN.4.2 Demonstrate understanding of basic concepts (Market Structure)

• Job_28:18 No mention

shall be made of coral, or

of pearls: for the price of

wisdom is above rubies.

Economics of Scale:

• If a firm’s start up costs are high, and its average costs fall for each additional unit it produces.

• Economies of scale are characteristics that cause a producer’s average cost to drop as production rises.

• This is because large, initial fixed costs.

• Like the cost of the factory and machinery, can be spread out among more and more goods as production rises.

Economics of Scale:

• A good example is a hydroelectric plant, which generates electricity from a dam on a river.

• A large dam is expensive to build, however, once the dam is built, the plant can produce energy at a very low additional cost simply by letting water flow through the dam.

• The average cost of the first unit of electricity produced is very high because the cost of the dam is so high.

Group Activity:

o Get in groups and come up with a list

and reasons for your list of Economies

of Scale that you would be willing to

invest in. (e.g., dams, theme parks,

malls, hospitals, etc).

Natural Monopolies:

o Public Water

o Electricity

o Gas and Power.

o Sewer Services

Government Monopolies:

• In the case of a natural monopoly, the government allows the monopoly to form and then regulates it.

• In other cases however, government actions themselves can create barriers to entry in markets and thereby create monopolies.

• A government monopoly is a monopoly created by the government.

Discussion:

o List four items that the government

should place a monopoly over and

explain why you believe the government

should do so.

Technological Monopolies:

• One way that the government can give a company monopoly power is by issuing a patent.

• A patent gives a company exclusive rights to sell a new good or service for 20 years.

• This encourages to invest in research and development and make profit off their efforts while benefitting society as a whole.

Franchises and Licenses:

• A franchise is a contract issued by a local authority that gives a single firm the right to sell its goods within an exclusive market.

• National companies often grant franchises to entrepreneurs, who then sell that company’s product in a local market.

Franchises and Licenses:

o Of a large scale, governments can issue a license granting firms the right to operate a business, especially where scarce resources are involved.

o Examples of scarce resources that require licensing include land and radio and television broadcast.

o The Federal Communication Commission issues licenses for individual radio and television stations.

o Local governments might license a single firm to manage all of their public parking lots.

Industrial Organizations

• In rare cases, the government allows the companies in an industry to restrict the number of firms in a market.

• For example the U.S. government lets MLB and other sports leagues restrict the number and location of their teams.

• The restrictions that the leagues impose help keep team play orderly and stable by preventing other cities from starting their own major league teams and crowding the schedule.

What is price discrimination?

Price Discrimination:

• Is based on the idea that each customer has a maximum price that he or she will pay for a good.

• If a monopolists sets the good’s price at the highest maximum price of all the buyers in the market, the monopolist will sell only to the one customer willing to pay that much.

• If the monopolist sets a low price the monopolist will gain a lot of customers.

• But the monopolist will lose the profits it could have made from the customers who bought at the low price but willing to pay more.

Market Power:

• Price discrimination is a feature of

monopoly but can be practiced by

any company with market power.

• This is the ability to control prices

and total market output.

• Market power and price

discrimination can be found in any

market structure except for perfect

competition.

Targeted Discounts:

• Companies divide consumers into larger groups and design pricing policies for each group.

• The different prices that firms charge each group for the same good or service are not related to production costs.

• One common form of price discrimination identifies some customers who are not willing to pay the regular price.

• Offers those customers a discount.

• Price discrimination can also mean that a company finds the customers who needs the good the most, and charges them more for that good.

Targeted Discounts: Discounted airfare

• Airlines offer discounts to

travelers who buy tickets

several weeks in advance.

• Or are willing to spend a

Saturday night at their

destinations.

Examples of Targeted Discounts: Manufacturers rebate offers:

• Manufacturers for big ticket items may refund a small part of the purchase to price to buyers who fill out a rebate form and mail it.

• People who take the time to fulfill the rebate requirement are likely more price-conscious.

• Than those who don’t and may be unwilling to pay full price.

Senior Citizen or Student Discounts:

• Many of these have lower

incomes and often

discounts are offered.

• Because they are unlikely

to pay full price for what

some consider luxuries.

Limits of Price Discrimination. (How It Works)

• Limits to Price

Discrimination.

• Three factors in order for

Price Discrimination to

work.

(1) Some Market Power

• For price discrimination to

work, firms must have

some control over prices.

• For this reason price

discrimination does not

happen in perfectly

competitive markets.

(2) Distinct Customer Groups

• The price discriminating firm must be able to divide customers into distinct groups based on their sensitivity to price.

• Monopolists must be able to guess the demand curves of different groups.

• One of which is more elastic, or price sensitive than others.

• By grouping customers, firms can increase profits by charging each group a different price.

(3) Difficult Resale:

• If one set of customers could buy the product at the lower price and then resell the product for a profit.

• The firm could not enforce its price discrimination.

• Because consumer goods can be resold, price discrimination works best in marketing services that are consumed on the spot.

• Such as restaurants, and theme parks that require IDs.

Group Activity:

o Divide in groups. Relay. Each member

of the group will come up on the white

board and list an example of either a

franchise, economies of scale, or price

discrimination (targeted discounts). The

team with the most list will win a prize.

Chapter 7:3 Monopolistic Competition and Oligopoly

• WHAT: Explain the characteristics and examples of monopolistic competition.

• WHAT: Explain how firms compete without lowering prices.

• WHAT: Explain how firms in a monopolistic competitive market set output.

• WHAT: Explain the characteristics and examples that give oligopoly.

• WHY: ECN.4.2 Demonstrate understanding of basic concepts (Market Structure)

• WHY: 12.2 (8). Explain the role of profit as the incentive to entrepreneurs in a market economy.

• (Mar 8:36) For what shall it

profit a man, if he shall gain

the whole world, and lose his

own soul?

Group Activity:

o Four volunteers with different pairs of

shoes and apply principles of

monopolistic competition.

Monopolistic Competition:

• In Monopolistic competition,

many companies compete in an

open market to sell products that

are similar but not identical.

• Each firm is monopolistic, it holds

a monopoly over its own

particular product design.

Monopolistic Competition:

• An example of a

monopolistically competitive

market is the market for

jeans.

• All jeans can be described

as denim pants but in stores,

buyers can choose from a

variety of brand names,

styles, colors, and sizes.

Monopolistic Competition:

• Unlike perfect competition, monopolistic competition is a fact of everyday life.

• Common examples include bagel shops, ice cream stands, gas stations, and retail stores.

Four Conditions of Monopolistic Competition:

• Many Firms: do not have high start up costs and can begin making money after a small initial investment.

• Fewer artificial barriers of entry: Patents no longer apply and no one can prevent firms from entering.

• Limited control over price: if price too high, consumers can go to a rival firm.

• Differentiated products: Firms can make consumers distinguish their products from other competing firms and attract purchases.

What is the maximum price you are willing to

pay for?

What is the maximum price you are willing to

pay for? Going out to eat?

What is the maximum price you are willing to

pay for?

Are you willing to pay more for a

brand?

Non Price Competition:

• Attracting consumers based

on:

• Physical characteristics

• Location

• Service Level

• Advertising, image, and

status

True Brand Name:

• In his days Judah shall be

saved, and Israel shall dwell

safely: and this is his name

whereby he shall be called,

THE LORD OUR

RIGHTEOUSNESS.

Jeremiah 23:6.

Brand Name Of the Church:

• Seventh-day (Sabbath)

Adventist (Belief in the

Second Coming).

What type of branding distinguishes Seventh-day

Adventists?

• “But ye are a chosen

generation, a royal

priesthood, an holy nation, a

peculiar people; that ye

should shew forth the

praises of him who hath

called you out of darkness

into his marvellous light:” 1

Peter 2:9.

What type of branding distinguishes Seventh-day

Adventists? • If ye love me, keep my

commandments. John 14:15.

• “Here is the patience of the saints: here are they that keep the commandments of God, and the faith of Jesus.” Revelation 14:12.

• For the grace of God that bringeth salvation hath appeared to all men, Teaching us that, denying ungodliness and worldly lusts, we should live soberly, righteously, and godly, in this present world; Titus 2:11-12.

What type of branding distinguishes Seventh-day

Adventists?

• (3Jn 1:2) Beloved, I wish

above all things that thou

mayest prosper and be in

health, even as thy soul

prospereth.

Prices, Output, and Profits.

• If a monopolistically competitive

firm raised prices too high, most

customers would buy the

cheaper product.

• Because customers can choose

among many substitutes.

• Monopolistically competitive

firms face more elastic demand

curves than true monopolists do.

Prices, Output, and Profits.

• Prices under monopolistic competition will be higher than they would be in perfect competition, because firms have some power to raise prices.

• However the number of firms and ease of entry prevent companies from raising prices as high as they would if they were a true monopoly.

• Total output under monopolistic competition falls somewhere between that of monopoly and that of perfect competition.

Profits:

• Like perfectly competitive firms monopolistically competitive firms earn just enough to cover all of their costs, Including salaries for the workers.

• If a monopolistically competitive firm started to earn profits well above its costs, two market trends would work to take those profits away.

Profits:

• Fierce competition would encourage rivals to find new ways to differentiate their products and lure customers back.

• The rivalries among firms prevent any one firm from earning excessive profits for long.

• New firms will enter the market with slightly different products that cost less than the market leaders that can lure consumers to substitutes.

Profits:

• You’ve seen this happen when

a brand-name line of clothing

or a video game becomes

popular.

• Competitors are quick to flood

the market with cheap

imitations (Transformers/ Go

Bots)

Group Activity:

o What determines you purchasing a pair

of jeans or a pair of shoes?

o Color?

o Brand?

o Price?

Oligopoly:

• Describes a market dominated by a few large profitable firms.

• It looks like an imperfect form of monopoly.

• Economists usually call an industry an oligopoly if the four largest firms produce at least 70 to 80 percent of the output.

• It has high barriers of entry such as high start up costs.

• Examples are the air travel, automobile companies.

Cooperation and Collusion:

• There are times when companies

illegally work together to set prices

and bar competing firms to enter

the market.

• Sometimes the market leader is

an oligopoly can start a round of

price increases or price cuts by

making its plans clear to other

sellers.

Cooperation and Collusion:

• This firm becomes a price leader.

• Price leaders can set prices and output for entire industries as long as other member firms go along with the leader’s price policy.

• A price war is harmful to producers but good for consumers because they will pay less for a good or service.

Cooperation and Collusion:

• Collusion refers to an agreement

among members of an oligopoly

to illegally set prices and

production levels.

• One outcome of collusion is

called price fixing, an agreement

among firms to sell at the same

or very similar prices.

Cartels:

• Stronger than a collusive agreement, a cartel is an agreement by a formal organization of producers to coordinate prices and production.

• Although other countries and international organizations permit them, cartels are illegal in the U.S. OPEC is the most famous.

• Cartels can survive only if every member keeps to its agreed output levels and non more.

POP QUIZ!!!!!!!!!!

B –Price Competition A-Non Price Competition

C –Brand Competition D –All of the Above

Competition through ways other than

lower prices such as distinguishing the

visual look (physical characteristics)of

the product, the location of the

business, or the type of service it offers

and advertising and image status.

B –Identical Products A-Differentiation

C –Brand Competition D –All of the Above

In imperfect competition, where

products that are similar and not

identical that can attract customers

such as denim where differences in

design, brand, and color that influence

buying.

B –Identical Products A-Differentiation

C –Brand Competition D –All of the Above

Type of products that there is no

difference between products such as

copy paper or rubber bands that is the

same regardless of brand.

B –Identical Products A-Perfect Competition

C –Brand Competition D –All of the Above

This is also called pure competition, the

simplest market structure where a

large number of firms all producing the

essentially the same product for the

same price.

B –Start up costs A-Late fees

C –Expenses D –All of the Above

The expenses a new business must pay

before it can begin to produce and sell

goods.

B –Economies of Fail A-Dumb

C –Expenses D –Economies of Scale

A hydroelectric dam where the initial

cost is very expensive but as the dam

produces electricity will make up for

the initial investment with each unit it

produces it called:

B –MLB A-Franchise

C –Single Business D –Economies of Scale

Burger King and KFC are examples of

businesses that grants them the right

to sell its good within an exclusive

market and will receive the materials,

uniforms, and colors of the parent

company by paying a fee.