Market StructuresEconomics Chapter 7

Agenda 10/27

1. CBM # 42. Types of Market Structures3. Group Activity: Market Structure Case Studies

Objective: We will understand the characteristics of competitive and uncompetitive markets when it comes to prices.

Market Structures• Market Structures – degree of competition among producers,

depends upon:

• Number of producers -- helps determine the level of competition more producers = more competition

• Similarity of products – degree to which producers in a market are similar. The more similar, the greater the competition

• Ease of entry -- markets that are easy to enter are the most competitive

• Control over prices -- ability to influence prices = market power the more competitive the market the less market power individual businesses have

• Nobody Sleeps in Economics Class!!!!

Perfect Competition• Many producers and consumers• Identical products• Easy entry into market• No control over prices• Prices determined by supply & demand• Consumers have easy access to information about

products and prices• Producers are forced to be efficient• Consumers pay equilibrium price

Monopolistic Competition• Many producers provide similar but varied

goods– Price competition – Non price competition – differentiation– Markets remain competitive

• Examples:– Restaurants– Plumbers– Health clubs– Hairdressers

Oligopoly• Small number of producers provide similar but not identical

goods• Producers have some control over prices – often set in response

to decisions of other producers• Industry dominated by a few firms producing similar products• Bigger producers have advantage over smaller producers –

economies of scale• Collusion – producers make agreements

on production levels and pricing• Cartels – set production levels and

prices for specific products, example OPEC -- organization of petroleum exporting countries

• Examples – airlines, automobiles, soda

Monopoly• Market in which a single producer provides unique product• Producers have:

– Significant control over prices– Less incentive to satisfy consumers– High Barriers to entering the market– Anti-Trust Laws stop Monopolies

• Most Monopolies are illegal• Types of Monopolies:

1. Resource monopolies – one producer controls a natural resource

2. Government created – protect inventors of products – copyrights/patents , National Park Service, licenses

3. Natural monopolies – single firm provides good or service more efficiently and at a lower cost – utility companies, cable

Economies of Scale

• Economies of scale: greater efficiency and cost savings that result from increased production

• Usually associated with natural monopolies

• Examples: cost of supplying water, cable company operating in neighborhood

Anti-Trust Laws

• United States antitrust law prohibits anti-competitive behavior – monopoly

• Encourage competition in the marketplace• Make illegal certain practices deemed to hurt

businesses or consumers or both• Sherman Antitrust Act – limits cartels and

monopolies – response to John D Rockefeller’s Standard Oil monopoly (1911)

Market Failures• Occur when markets do not allocate goods

and services efficiently:

Monopoly, Oligopoly and Monopolistic Competition are all examples of Market Failure

How else can a market fail???Externalities & Public Goods

Externalities and Public GoodsExternalities – things that affect someone other than producer or consumer; spillover effects, either costs or benefits, resulting from the actions of companies or individuals

Examples: • factory dumps chemical waste into a river, people downstream get sick• neighbor plants a new flower garden, results are pleasing to you

Public Goods – good available for everyone – regardless of ability to pay (opposite of private goods)goods and services that are not provided by the market system because of the difficulty of getting people who use them to pay for their use.

Examples:• Streetlights and sidewalks• fire and police services, national defense, public parks

Private firms do not provide us with these public goods because they have no way to make the people who benefit from them pay for them.

Market Structures – Case Studies

• Class Activity – Groups of 4, examine case studies, create posters and present findings to class

Market StructuresPerfect

CompetitionPure

Monopoly

Monopolistic Competition Oligopoly Monopoly

The further right on the scale, the greater the degree of monopoly power exercised by the firm.

Perfect Competition Monopolistic Competition

Oligopoly Monopoly