Lead off 2/23

Do you prefer Pepsi or Coca Cola? Why?

Markets: Structure, Failure, and the Role of the Government

Chapter 7

I. Market Structure

• How businesses relate to each other• Official definition: the nature and degree of

competition among firms in the same industryA. Perfect CompetitionB. Monopolistic CompetitionC. OligopolyD. Monopoly

I. Market StructureA. Perfect Competition

1. Conditions• Large number of buyers and sellers• Identical products• Independent buyers and sellers• Well informed buyers and sellers• Easy entrance into market

2. Profit Maximization• Price is set by supply and demand (producer has to take the price that is

established)• Firm should produce as much product as possible at the lowest price

(until marginal cost=marginal revenue)3. Theory vs. Reality

• Perfect competition does not really exist (maybe a roadside produce sale)• Gives a baseline for comparison

B. Monopolistic CompetitionC. OligopolyD. Monopoly

I. Market StructureA. Perfect CompetitionB. Monopolistic Competition (ex: clothing, software)

1. Characteristics• Many companies• Sellers try to gain a larger share of the market from their competition• Product differentiation – sellers try to make their products more

attractive (real or perceived)• Use of advertising• Easy to enter market• Compete with a narrow range of price differentiation

2. Profit Maximization• Convince consumers to pay higher price (differentiation or advertising)• Have a low enough price to draw consumers away from competition

C. OligopolyD. Monopoly

I. Market StructureA. Perfect CompetitionB. Monopolistic CompetitionC. Oligopoly (ex: soft drinks, major airlines)

1. Characteristics• A few large sellers• Difficult to enter market• Firms follow each other in pricing (although not allowed to

cooperate)• Compete only with advertising and product differentiation

2. Profit maximization• Firms try to convince consumers their product is better

D. Monopoly

I. Market StructureA. Perfect CompetitionB. Monopolistic CompetitionC. OligopolyD. Monopoly

1. Types• Natural – cost to provide service makes it impractical for more than

one firm to provide a good or service (ex: electricity)• Geographic – only one firm exists in an area (ex: Country Mart)• Technological – only one firm has the capability to provide (ex:

pharmaceutical companies)• Government - the government is the sole provider of a good or

service (ex: sewage/water)• Illegal – businesses working together (collusion)

2. Profit maximization – business can charge whatever price they want! (To a point)

Lead off 2/24

Read “Cover Story” and the first paragraph of text on page 1731. What type of writing is this article? (Make

Mrs. Bland proud!)2. Do you think what is proposed is a good idea?3. What other situations can you think of where

customers at a business cause negative effects on others?

II. Market Failure

A. Defining market failure1. Conditions for a functioning free enterprise

economy• Adequate competition• Adequate information• Resource mobility• Price and cost are closely related

2. Failure = when any of the conditions are not met

II. Market FailureB. Reasons for market failure

1. Inadequate competition• Resources are wasted- don’t have to compete for resources• Prices are too high - don’t have to compete for customers• Production declines • Political corruption - can leverage economic power over the

government

2. Inadequate information - since economics is about choices and trade-off, lack of information will lead to bad choices

3. Resource immobility - if people and resources can’t or wont move to where they are needed they cannot be productive

4. Externalities - 5. Need for public goods -

II. Market FailureB. Reasons for market failure

1. Inadequate competition-2. Inadequate- 3. Resource immobility - 4. Externalities - consequences of economic actions felt

by those not directly involved• Can be positive or negative• The problem: market economy works when profits are tied

to good decision making. When that connection is lost, people cannot make good decisions about how to employ resources

5. Need for public goods - products used by everyone in a society• A market economy will not produce such things on its own• The government must provide those things instead

III. The Role of Government

*There are things the government does to limit market failureA. Protector of competition

1. Sherman Anti-trust Act - outlawed many monopolies

2. Clayton Anti-trust Act - strengthened the Sherman Act and made price discrimination illegal

3. Federal Trade Commission Act - made price fixing among firms illegal

B. RegulatorC. Informer

III. The Role of Government

*There are things the government does to limit market failureA. Protector of competition

B. Regulator1. Makes rules for natural monopolies2. Agencies that regulate (make rules about)

• Food safety• Stocks• Discrimination• Air travel• Pollution• Work place safety

3. Internalizing externalities - ex: tax on business that pollutes • Supply decreases (less pollution)• Price increases (customers suffer)• Money used to clean up pollution (innocent party helped)

C. Informer

III. The Role of Government

*There are things the government does to limit market failureA. Protector of competitionB. RegulatorC. Informer

1. Publicly traded companies must disclose financial information2. government gathers and publishes economic information (unemployment rate, etc.)