7-1: WHAT IS PERFECT COMPETITION?

Competition

• Economists classify markets based on how competitive they are

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• Market structure: an economic model of competition among businesses in the same industry

Perfect Competition

• Definition: ideal model of a market economy
• Perfect competition is used as a basis to determine how competitive a market is

5 Characteristics of Perfect Competition

• 1. Numerous buyers and sellers
• This ensures that no single buyer or seller has the power to control the price in the market

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5 Characteristics of Perfect Competition (continued)

• Buyers have lots of options
• Sellers are able to sell their products at market price

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• 2. Standardized product
• A product that consumers see as identical regardless of the producer
• Example: milk, eggs, etc.

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Characteristics of Perfect Competition (continued)

• 3. Freedom to enter and exit markets
• Producers enter the market when it is profitable and exit when it is unprofitable

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Characteristics of Perfect Competition (continued)

• 4. Independent buyers and sellers
• This allows supply and demand to set the equilibrium price

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Characteristics of Perfect Competition (continued)

• 5. Well-informed buyers and sellers
• Buyers compare prices
• Sellers know what consumers are willing to pay for goods

Price Taker

• When these 5 conditions are met, sellers become price takers—a business that accepts the market price determined by supply and demand

Imperfect Competition

• Market structures that lack one of the conditions needed for perfect competition are examples of imperfect competition
• This means there are only a few sellers and/or products are not standardized
• Examples: corn and beef markets

7-2: THE IMPACT OF MONOPOLY

Characteristics of a Monopoly

• Monopoly: a market structure in which only one seller sells a product for which there are no close substitutes
• Pure monopolies are rare

Characteristics of a Monopoly (continued)

• A cartel is close to a monopoly
• Cartel: a group of sellers that act together to set prices and limit output
• Example: OPEC—11 nations hold more than 2/3 of the world’s oil reserves

Characteristics of a Monopoly (continued)

• A monopoly is a price maker—a business that does not have to consider competitors when setting the price of its product
• Consumers accept the price of the product

Characteristics of a Monopoly (continued)

• Other firms struggle to enter the market due to a barrier to entry—something that stops the business from entering a market

3 Characteristics of Monopolies

• 1. Only One Seller
• Supply of product has no close substitutes

3 Characteristics of Monopolies

• 2. A Restricted, Regulated Market
• In some cases, government regulations allow a single firm to control a market (think utilities)

3 Characteristics of Monopolies

• 3. Control of Prices
• Prices are controlled since there are no close substitutes

Types of Monopolies

• First, not all monopolies are harmful

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• Natural monopoly: occurs when the costs of production are lowest with only one producer

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Types of Monopolies (continued)

• Example of a natural monopoly= public utilities. It would be inefficient to have more than one a water company competing for customers.
• A single supplier would be most efficient according to economies of scale: when the average cost of production falls as the producer grows larger

Types of Monopolies (continued)

• Government monopoly: exists because the government wither owns and runs the business or authorizes only one producer
• Example: U.S. Postal Service

Types of Monopolies (continued)

• Technological monopoly: occurs when a firm controls a manufacturing method, an invention, or a type of technology
• Example: a patent, where an inventor has exclusive rights to that invention or process for a certain number of years

Types of Monopolies (continued)

• Geographic monopoly: exists when there are no other producers within a certain region
• Example: professional sports teams