Chapter 7.1 Notes

Market Structures

Perfect Competition

• There are many buyers and sellers of similar products

• Firms produce a standardized product of commodity. A commodity is a product that is identical across producers. – Example – bushel of wheat, coffee beans, corn, etc.

• Firms can easily enter or leave the market• Buyers are fully informed about the product

Perfect Competition (CONT.)

• A perfect competitive firm is so small relative to the size of the market that the firms choice about how to produce has no effect on the market price.

PRICE

QUANTITY

d

Monopoly

• A monopoly is opposite

of perfect competition

• From the Greek word

meaning “one seller”

• Monopoly has extreme

market power – the ability to raise its prices without losing all sales to competitors.

Monopoly (CONT.)

• Barriers to Entry – restrictions on the entry of new firms into a market.1. Legal Restrictions - Sometimes entry to a market is illegal. Patents, regulations and the government sometimes provide legal protection against competition. Ex – bus and taxi services, electricity and cable t.v. (UBER is now challenging this)2. Economies of Scale – A single firm can sometimes satisfy the market demand at a lower cost per unit than could two or more smaller firms.

• 3. control of essential resources – sometimes a country or a firm controls a critical resource used for production.– Ex – Alcoa controls most of the worlds supply

of bauxite– Ex – the worlds diamond trade has been

controlled by De Beers Consolidated Mines

4 types of Monopolies

• Geographical monopoly – Your store is the only store producing a specific item in a small town.

• Technological monopoly – Your business has superior technological advances than your competition.

• Government monopoly – government control of business – ex – public education, electricity and cable companies

• Natural monopoly – when monopolies form naturally.

Oligopoly

• Two or three companies control the industry…

• Example – Cereal companies

• Kellogg, General Mills, Post (85%of all cereal is sold through these three)

Monopolistic Competition

• - Closest model to our capitalistic system

• These items sold are “like” or similar products

• Entry into the market is easy.

• Competition is fierce.

• Example – Verizon, AT&T, Sprint, T-Mobile, Boost, Metro PCS