7-1: PERFECT COMPETITION

NOTES

LEARNING TARGETS

• 1. I WILL DEMONSTRATE MY UNDERSTANDING

OF THE CHARACTERISTICS OF PERFECT

COMPETITION AND MONOPOLIES.

MARKET STRUCTURES

• MARKET STRUCTURE: AN ECONOMIC MODEL

OF COMPETITION AMONG BUSINESSES IN THE

SAME INDUSTRY

MARKET STRUCTURES• ECONOMISTS CLASSIFY MARKETS BASED ON SEVERAL

FACTORS:

• THE NUMBER OF PRODUCERS: THIS HELPS DETERMINE

THE LEVEL OF COMPETITION; MORE PRODUCERS

MEANS A MARKET IS MORE COMPETITIVE

• THE SIMILARITY OF PRODUCTS: THE MORE SIMILAR

THE PRODUCT, THE MORE COMPETITION THAT EXISTS

MARKET STRUCTURES

• THE EASE OF ENTRY: HOW EASY IS IT TO ENTER

A PARTICULAR INDUSTRY AND START A NEW

BUSINESS

• CONTROL OVER PRICES: THE MORE

COMPETITIVE THE MARKET IS, THE LESS

CONTROL OVER PRICES PRODUCERS WILL HAVE

PERFECT COMPETITION

• THE MOST COMPETITIVE MARKET STRUCTURE IS

PERFECT COMPETITION

• IN THIS MARKET STRUCTURE, FIRMS

ESSENTIALLY PRODUCE THE SAME PRODUCT

• ALL GOODS ARE SOLD AT

EQUILIBRIUM PRICE OR

MARKET PRICE

• IN THE REAL WORLD, THIS

MARKET STRUCTURE IS

RARE

• EXAMPLES: THE

WHEAT, CORN,

TOMATO, AND MILK

INDUSTRIES

CHARACTERISTICS OF PERFECT COMPETITION

• 1. NUMEROUS BUYERS AND

SELLERS

• NO SINGLE BUYER OR SELLER

HAS THE POWER TO CONTROL

THE PRICE IN THE MARKET

• BUYERS HAVE LOTS OF

OPTIONS

• SELLERS ARE ABLE TO SELL

THEIR PRODUCTS AT

MARKET PRICE

CHARACTERISTICS OF PERFECT COMPETITION

• 2. STANDARDIZED/IDENTICAL PRODUCT

• A PRODUCT THAT CONSUMERS SEE AS IDENTICAL

REGARDLESS OF THE PRODUCER

CHARACTERISTICS OF PERFECT COMPETITION

• 3. FREEDOM TO ENTER AND EXIT THE MARKET

• PRODUCERS FACE FEW RESTRICTIONS IN

ENTERING THE MARKET

• ALL FIRMS FACE COMPETITION AND NO

SINGLE FIRM CAN DOMINATE THE MARKET

CHARACTERISTICS OF PERFECT COMPETITION

• 4. PRODUCERS HAVE NO CONTROL OVER PRICES

• THEY ARE PRICE TAKERS BECAUSE THEY MUST

ACCEPT THE MARKET PRICE FOR THEIR GOOD

• IF A PRODUCER TRIES TO SELL A GOOD OVER

MARKET PRICE, HE/SHE WILL NOT SELL ANY

UNITS

CHARACTERISTICS OF PERFECT COMPETITION

• 5. EASY ACCESS TO INFORMATION ABOUT

PRODUCTS AND PRICES

• BUYERS COMPARE PRICES

• PRODUCERS KNOW WHAT CONSUMERS ARE

WILLING TO PAY FOR GOODS

7-2: MONOPOLIES

IMPERFECT COMPETITION

• ECONOMISTS DEFINE IMPERFECT COMPETITION AS

ANY MARKET STRUCTURE IN WHICH PRODUCERS HAVE

SOME CONTROL OVER THE PRICE OF THEIR PRODUCTS

• THE MOST EXTREME VERSION OF IMPERFECT

COMPETITION IS A MONOPOLY

CHARACTERISTICS OF MONOPOLIES

• 1. ONE PRODUCER: THERE IS NO COMPETITION IN A

MONOPOLY

• 2. UNIQUE PRODUCT: GENERALLY, IT IS THE ONLY

PRODUCT OF ITS KIND

• THERE ARE NO SUBSTITUTES AND NO OTHER

PRODUCERS PROVIDE SIMILAR GOODS OR SERVICES

CHARACTERISTICS OF MONOPOLIES

• 3. HIGH BARRIERS TO ENTRY: PREVENTS OTHER

FIRMS FROM TRYING TO ENTER THE MARKET

• 4. SUBSTANTIAL CONTROL OVER PRICE:

MONOPOLIES ARE PRICE MAKERS SINCE THEY

CONTROL THE SUPPLY OF A GOOD

MONOPOLIES

• A PURE MONOPOLY IS RARE

IN TODAY’S ECONOMY

• HISTORICALLY, STANDARD OIL

IS AN EXAMPLE OF A

MONOPOLY

• WITH THE DEVELOPMENT

OF ANTI-TRUST LAWS THE

COMPANY WAS LATER

BROKEN UP

MONOPOLIES

• THERE ARE ALSO LEGAL MONOPOLIES THAT THE

GOVERNMENT ALLOWS TO EXIST UNDER CERTAIN

CIRCUMSTANCES

• GOVERNMENT MONOPOLY: EXISTS BECAUSE THE

GOVERNMENT EITHER OWNS AND RUNS THE

BUSINESS OR AUTHORIZES ONLY ONE PRODUCER

• EXAMPLE: U.S. POSTAL SERVICE

MONOPOLIES

• NATURAL MONOPOLY: WHEN A SINGLE FIRM

CAN SUPPLY A GOOD OR SERVICE MORE

EFFICIENTLY AND AT A LOWER COST THAN

TWO MORE COMPETING FIRMS CAN

• EXAMPLE: PUBLIC UTILITIES: GAS, WATER,

CABLE, AND ELECTRICITY

MONOPOLIES

• A NATURAL MONOPOLY OCCURS WHEN A

PRODUCER CAN TAKE ADVANTAGE OF

ECONOMIES OF SCALE TO DOMINATE A MARKET

• ECONOMIES OF SCALE MEANS THAT A FIRM

DECREASES ITS COSTS OF PRODUCTION AS IT

INCREASES ITS OUTPUT

MONOPOLIES

• GEOGRAPHIC MONOPOLY: EXISTS WHEN

THERE ARE NO OTHER PRODUCERS WITHIN A

CERTAIN REGION

• EXAMPLE: A GENERAL STORE IN A SMALL

TOWN (HAVING MORE THAN ONE STORE

WOULD MAKE MULTIPLE STORES LOSE

MONEY)

MONOPOLIES

• TECHNOLOGICAL MONOPOLY: WHEN A FIRM

CONTROLS A MANUFACTURING METHOD, AN

INVENTION, OR A TYPE OF TECHNOLOGY

• THE FIRM MIGHT HAVE A PATENT: EXCLUSIVE RIGHTS

TO THAT INVENTION OR PROCESS FOR A CERTAIN

NUMBER OF YEARS

• EXAMPLE: PRESCRIPTION DRUGS

MICROSOFT, APPLE, AND GOOGLE

• LIST THE PRODUCTS AND SERVICES THAT COME

TO MIND WHEN YOU THINK OF MICROSOFT,

APPLE, AND GOOGLE.

• DO ANY OF THESE COMPANIES FIT THE

DESCRIPTION OF A MONOPOLY?