Laissez-faire philosophy that government should not interfere with commerce/trade.
Combination of many small firms produced large firms. Industries were created.
Industry the supply side all producers in a product treated collectively. Auto industry, appliance industry.
Market Structure Nature and degree of competition among firms in the same industry
Markets are classified by structure (4)
1. Pure Competition
2. Monopolistic competition
3. Oligopoly
4. Monopoly
Pure Competition (5 conditions) This is a theoretical situation. No true Pure competition exists. Farmers Market is close.
1. Large number of buyers and seller. No single buy or seller can influence the price
2. Buyers and sellers deal in identical products. No differences. Salt. Flour. commodity
3. Each buyer and seller acts independently. No Collusion.
4. Buyers and sellers are both well informed.
5. Buyers and sellers are free to enter the market, conduct business and free to leave the market.
Each individual firm is too small to influence prices. It must accept the industry price. The industry sets the equilibrium price. Price becomes fixed to everyone in the industry.
Because the individual firm has to accept the equilibrium price determined by the industry the demand curve is horizontal.
The quantity produced is determined by production cost (Marginal cost). MC = MR.
Purely competitive firms will increase production to where the marginal cost is equal to the marginal revenue and then sell at the equilibrium price.
This is theory. This is the benchmark by which the other forms of market structures are Evaluated.
Imperfect Competition market structure where all conditions of pure competition are not met; monopolistic competition, oligopoly, and monopoly.
Monopolistic Competition All the characteristics of Pure Competition but products are not identical.
Product Differentiation the real or imagined differences between competing products in the same industry.
Product is not identical. Differences may be real or imagined.
Differentiation may be color, packaging, store location, store design, store decorations, delivery, service, anything!
Non Price competition involving the advertising of a product's appearance, quality, or design, rather than its price.
Competition due to differentiation. Advertising to help the consumer believe that this product is different.
If the seller can differentiate a product in the mind of the buyer they can raise the price. Role of Advertising.
Profit Maximization Product is produced in quantities where the marginal cost is equal to its marginal revenue and then sell the product at whatever price the market will bear. If it can differentiate its product it can charge a higher price.
In time the number of firms will stabilize. the supply will stabilize, no great profits or losses to those left in the industry.
Oligopoly Very few Sellers/Producers.
Products may be differentiated or identical (standardized)
Auto, Steel, Soft Drinks, Fast Food, Airlines, Television Networks, etc.
Independent Behavior. Because their are so few competitors. The actions of one affects all the producers.
Collusion an agreement to act together or behave in a cooperative manner.
collusion agreements usually illegal, among producers to fix prices, limit output, or divide markets.
Price Fixing setting the same prices. Illegal in the US.
Price Behavior
Price Wars Series of price cuts that competitors must follow or lose business.
Price War fierce price competition between sellers, sometimes the price is lower than the cost of production.
Ologopolists prefer to compete on non-price basis.
Independent Price setter a firm sets prices based demand, cost of input and other factors.
Independent Pricing policy by an imperfect competitor that ignores other producers and some market conditions.
Price Leadership one firm sets prices and other follow to keep market share or for financial benefit.
Price Leader independent pricing decisions made by dominate firm on a regular basis that results in generally uniform industry-wide prices.
Profit Maximization where marginal cost is equal to marginal revenue and then charge whatever the market will bear.
Price for products higher than under monopolistic competition and much higher than under pure competition.
Ologopolist do not collude formally, act conservatively and like price hikes by their rivals.
Monopoly Exact Opposite of Pure Competition. A price maker. No supply curve.
They determine quantity by Demand. They adjust supply to fit Demand.
Marginal Cost & Marginal Revenue and lower than the price allowing excess profits.
Pure Monopoly only one seller of a product that has no close substitutes.
Pure monopolies do not exist. Near monopolies exist and economists refer to near monopolies.
4 distinct types of Monopolies.
1). Natural Monopoly. Where costs are minimized by having a single producer of the product.
Gas, water, electricity. Government create Natural Monopolies by Franchise.
Franchise - the right to produce or do business in a certain area without competition.
Government franchises come with government regulation.
Economies of Scale Company grows Larger it reduces its production costs
The more efficient its use of personnel, plant and equipment as a firm becomes larger.
2). Geographic Monopoly. The only business in a location due to size of market.
3). Technological Monopoly, Firm has discovered a new process or product.
Constitution gave government the right to grant technological monopolies.
Patent - 17 years exclusive rights.
Copyright - Artists and writers Life plus 50 years.
4). Government Monopoly - Retained by the government. Liquor sales, uranium production, water, etc.
Monopolists determine quantity to supply by Profit maximization rather that Margin Cost/Marginal revenue.
Review Five characteristics of Pure competition. What are the four types of market structures. Differences.
Topic 20 Market Failures
Markets work best when four conditions are met:
1. Adequate competition must exist in all markets.
2. Buyers and sellers but be reasonably well-informed about conditions and opportunities
3. Resources must be free t move from one industry to another.
4. Prices must reasonably reflect the costs of production including rewards to entrepreneurs.
Market Failure occurs when any of the 4 conditions alter significantly.
5 Types & Causes for Market Failure:
1. Inadequate Competition
Dangers of monopolies
Monoplies denies consumers the benefit of competition.
Monopolies prevent competition and restrict production. artificial shortage that lead to higher prices.
Monopolies may waste and misallocate scarce resources because there is no competition.
Economic and Political Power
Size may make a company powerful enough to give tax breaks or other political breaks to save jobs.
Both sides of the market.
Supply side - competition in monopolistic markets. Oligopolies may collude to act as monopolies.
Monopolies limit supply.
Demand Side How many buyers are their for Aircraft Carriers, tanks, spy satellites?
Government Policies need to maintain or increase competition rather than to regulate less competitive markets.
2. Inadequate Information
A free enterprise economy requires information.
It is difficult to employ resources for the fullest benefit of society without adequate information.
3. Resource Immobility
The efficient allocation or resources require that land, labor, capital and entrepreneurs be free to move to markets where returns are the highest
4. Externalizes. Side Effects.
A side effect that benefits or harms a third party that was not directly involved in the activity.
Negative Externality. People are harmed or inconvenienced by an economic decision.
Positive Externality. People benefit from an economic decision but were not directly involved.
Externatlities as Market Failures. Not reflected in the market price of buyer/seller of the original price.
5. Public Goods
Public Goods - Products that are collectively consumed by the population. highways, police, fire, schools, national defense, etc.
Market Economy meets the needs and wants of individuals but fails to satisfy the collective needs of society.
Government must determine and supply Public Goods.
Review What are the five types of market failure.
Topic 21 The Role of Government
Government has the power to maintain competition, regulate monopolies, or to run government-owned monopolies.
Since the last 1800 the US have passed laws to restrict and regulate monopolies and trusts.
Trust a legally formed combination of companies.
Antitrust Legislation
1890 - Sherman Antitrust Act
law against monopolies that hindered competition or made competition impossible.
1914 - Clayton Antitrust Act
outlawed price discrimination - charging different customers different prices for the same product.
1914 - Federal Trade Commission Act
passed to enforce the Clayton Antitrust Act. Authority to issue Cease and Desist order.
Cease and Desist Order: FTC ruling requiring a company to stop an unfair business practice that reduces or limits competition.
1936 - Robinson Patman Act - Strengthend the Clayton Antitrust Act.
Companies could no longer offer special discounts prices only to certain customers.
Government Regulation
Maintains competition by regulating some monopolies prices and the quality of some services offered to the public.
Public Disclosure
The requirement that business reveal information to the public
SEC - business must disclose to investors annual reports and information on sales and profits.
Federal Reserve - Banks must reveal information on their operations.
Advantage - it has little cost to the government and provides the market with information to prevent market failures.
Modified Free Enterprise
Restrictions on economic freedom are put to bring about a more efficient use of resources,
not to prevent the benefits of competitions.
Promote and encourage competition with the rules of fair play.
Prevent and do away with monopolies that do no allow the public to benefit
Regulate industries in which a monopoly is clearly in the public good.
Modified private enterprise economy is a mixture of different market structures, different kids of business organizations and varying degrees of government regulation