Economics Notes

CHAPTER 8

FOUR MARKET STRUCTURES

1.     Monopoly- One seller

2.     Oligopoly- Fewer sellers

3.     Monopolistic Competition: Many Sellers

4.     Perfect Competition – Very Many sellers

PERFECT COMPETITION

When stores sell the same products. Example: Stores selling T-Shirts on the coast of Florida.

5 Conditions Of Perfect Competition

1.      Large market-

You have a lot of sellers (producers) and buyers (consumers). Tons of stores sell T-shirts.

2.      Similar Product-

Items are near Identical. Shirts are pretty much the same.

3.      Easy Entry and Exit

Competitors can move freely in and out of business, without restrictions and without start up costs. You can buy t-shirts on the Internet…cheaply, easy to start your own store

4.      Easily obtainable Information

Info about products and costs are easy to obtain. Internet

5.      No control over price

Supply and Demand controls the market, not a single seller or buyer.

IMPERFECT COMPETITION

Exist when any individual or group buys or sells a good or service in amounts large enough to affect price. EXAMPLES: Monopoly, Oligopoly

1.  PURE MONOPOLY

Is the most extreme form of imperfect competition. Example: MLGW

Pure Monopoly has Four Characteristics

1.      Single seller

2.      No substitutes

3.      No Entry

Barriers of entry- obstacles prevent others from entering the market

1.      Start up cost

2.      Government Restrictions

3.      Control of Resources

4.      Consumer Loyalty

4.      Control over prices

Cartel

·       A group of businesses that join together to dominate a market.

·       Businesses get together and try to control the price of what they are marketing. It is illegal in the U.S., but, not in other countries.

·       It is called COLLUSION: When companies work together to control prices. COLLUSION IS ILLEGAL IN THE UNITED STATES.

o   EXAMPLE OF A CARTEL:

§  OPEC- Organization of Petroleum Exporting Countries

§  5 original members of OPEC:

Saudi Arabia, Iran, Iraq, Kuwait, Venezuela

1973 OPEC Cut us off from oil.

Ø  OPEC Oil Embargo in 1973- In 1973, there was a war fought between Israel and Egypt.  We supported Israel and gave 2 billion dollars to them to help with the war.  Egypt got angry with us and cut off our oil supply. The U.S. limited people’s supply of gas. People could only buy gas every other day and only $10 worth of gas at a time.

           

TYPES OF MONOPOLIES

1.     Natural Monopoly

·       You can make and sell the product cheaper than anyone else (maybe they have control of the raw materials or better technology

2.     Geographic Monopoly

·       You have the best location.

Example: If you are boating at Pickwick and run out of gas, there is only one gas station there to get more

3.     Technological Monopoly

·       You invented it! You apply for a PATENT…that is the license from the government that you are the only one who can produce that object.

4.     Government Monopoly

·       When the government will not allow anyone to start a business in that field. In the 1960’s and 1970’s NASA (National Aeronautics and Space Administration) was the only organization that the government would let put a satellite in space. Now there are more options.

MLGW: is a combo between Natural and Geographic

2.  OLIGOPOLY

An industry in which a few suppliers exercise some control over price. 

EXAMPLES: Gas Companies, Airlines, Soft Drink Industry (Coke, Pepsi)

Characteristics of an Oligopoly

1.     Domination by a few sellers (Few airlines)

2.     Barriers to entry (Southwest does not fly out of Memphis, not enough gates in the airport) Start up costs

3.     Identical or slightly different products (all fly round trip flights)

4.     Non price competition (upgrades: coach to 1^st class, flight movies, non-stop vs. layovers, & business man specials)

·       Product Differentiation: Non-priced competition

5.     Limited control over price

ADVERTISING:

            Informative: The company will tell you about their product

Comparative: When a company takes their product and compares it to others.

Sherman Anti Trust Act (1890)

Makes it illegal for monopolies to exist

Federal Agencies that Government Agencies

MERGERS: (FROM CH 7)

HORIZONTAL MERGER (Think Equal)

            Merger between companies at the same level (competing companies)

                        Example: ATT&T & T-Moble, Exxon merged with Mobile, BP and Shell, Taco Bell and KFC

VERTICAL MERGER (Different levels)

Companies that sell to each other. People are at different levels.

                        Examples: KFC could merge with Tyson

CONGLOMERATE MERGER (Nothing in common)

Merger between companies that have nothing in common

Examples: Walt-Disney OWNS Movies, ABC, ESPN, Maybelline & Purina Dog Food