Perfect Competition

• Total Supply & Total Demand interact Equilibrium Price (Q.D. = Q.S.)

• Rarely seen in real world

5 Conditions of Perfect Competition

1. Large Market (lots of buyers and sellers)

2. Similar Product

3. Easy Entry and Exit-Sellers can’t prevent competition (entry to market)

4. Easily Obtainable Info-Info on P, Q, S easy to find

5. No control over Price-S & D control market, NOT single buyer or seller

Real Life Example: Agriculture

• Farmers accept market Price– Can’t sell more expensive: no one will buy– Won’t sell cheaper: lose $$$

• Crop similar (corn is corn…)

• Costs low to buy/rent farmland compared to starting a corporation. Farming methods can be learned

• Info. easy to find

• 1 farmer has no control of price

Wanted: Perfect Competition

• Competition price so only

covers cost of production and normal profit = GREAT FOR CONSUMERS!!

Imperfect Competition

• Individual or group buys/sells product in large enough amounts that price is affected

• Monopolies, Oligopolies and Monopolistic Competition = Imperfectly Competitive

Pure Monopoly

• Most extreme form of imperfect competition

• Single seller controls Supply of product and so determines Price– Some electric

companies– Postal Service first

class mail delivery

4 Characteristics of Pure Monopoly:

1. Single Seller

2. No substitutes

3. No entry-barriers to prevent others from entering market

4. Almost complete control of price-control price by controlling supply

-however, can’t charge outrageous price

because law of demand (P up, D down)

Types of Monopolies

1. Natural-

• Produce products for lowest cost, force competitors out of business

• Need large investment

• More efficient to have one business

*EG: Electric Company

Types of Monopolies

2. Geographic-

• Best location

• But many losing importance

*EG: small-town

auto repair shop

OR Wal-Mart

Types of Monopolies

3. Technological-

• Seller has patent– Gives right to exclusively manufacture an

invention for a specific # of years

*EG: Polaroid film

OR any invention!

Types of Monopolies

4. Government-• Created by legal barriers to entry

• EG: Tennessee Valley Authority (TVA)– federally owned corporation in U.S. created in May

1933 to provide navigation, flood control, electricity generation, fertilizer manufacturing, and economic development in the Tennessee Valley (region greatly impacted by Great Depression)

Cartel

• International monopoly

• Arrangement among groups of industrial business, usually in different countries, to reduce international competition by controlling price, production, and distribution of goods

• EG: OPEC -1960

Oligopoly

• A few suppliers dominate, have some control of price

• Examples?– Airline industry– Cigarette industry– Domestic car industry

5 Characteristics of Oligopolies:

THINK AIRLINE INDUSTRY…

• A few sellers dominate

• Barriers to entry

• Identical or slightly different products

• Nonprice competition

• Limited control over price (eg: price wars)

Nonprice Competition

• Style

• Color

• Convenience

Oligopolies

Are they harmful?

-Compared to perfectly competitive industry, NO!

-Stable prices, wider variety of products

Monopolistic Competition• Large # sellers offer similar but slightly

different products

• Very common in many U.S. industries • Competitive Advertising

5 Characteristics of Monopolistic Competition:

THINK TOOTHPASTE INDUSTRY

• Numerous sellers• Relatively easy entry• Differentiated products• Nonprice competition• Some control over price

-due to customer loyalty and product differences

Comparison (p. 232)

Least Competitive Most Competitive

Monopolistic

Competition

Many sellers

Monopoly

1 seller

Oligopoly

Few sellers

Perfect

Competition

Very many sellers

Homework

• Write 2 paragraphs. Explain which market structure (perfect competition, pure monopoly, oligopoly, or monopolistic competition) is best for:

A. The consumer

B. The producer

Due tomorrow.

Homework

• Read Chapter 10, Section 3 (p. 244-247) for tomorrow!!!