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CH 7: Market Structures
Terms in this set (89)
an economic model of competition among businesses in the same industry
ideal model of a market economy
one that consumers see as identical regardless of producer
business that accepts the market price determined by supply and demand
occurs in markets that have few sellers or products that are not standardized
occurs when there is only one seller of a product that has no close substitutes
group that acts together to set prices and limit output
firm that does not have to consider competitors when setting the prices of its products
barrier to entry
makes it hard for a new business to enter a market
(a) natural monopoly
the costs of production are lowest with only one producer
the government either owns and runs the business or authorizes only one producer
(a) technological monopoly
occurs when a firm controls a manufacturing method, invention, or type of technology
(a) geographic monopoly
exists when there are no other producers within a certain region
economies of scale
occur when the average cost of production falls as the producer grows larger
gives an invention the exclusive property rights to that invention or process for a certain number of years
occurs when many sellers offer similar, but not standardized, products
effort to distinguish a product from similar products
occurs when producers use factors other than low price to try to convince customers to buy their products
moderated discussion with small groups of consumers
market structure in which only a few sellers offer a similar product
company's percent of total sales in a market
expenses that a new business faces when it enters a market
set of rules or laws designed to control business behavior
defines monopolies and gives government the power to control them
group of firms combined in order to reduce competition in an industry
joining of 2 firms to form a single firm
occurs when businesses agree to set prices for competing products
occurs when competing businesses divide a market amongst themselves
occurs when businesses set prices below cost for a time to drive competitors out of a market
cease and desist order
requires a firm to stop an unfair business practice
policy that requires businesses to reveal product information information
reduces or removes government control of business
economists determined how competitive a market is
who determines how competitive a market is?
determined how far they fall from reaching perfect competition
how is a market deemed competitive?
many buyer/sellers, standardized product, freedom to enter/exit the market, independent buyers/sellers, well-informed buyers/sellers
for perf comp to exist, what are the 5 characteristics that make it up?
for perf. comp. to exist, must be a big # of buyers/sellers so no one can raise/lower the price when they want to
for perf. comp. to exist, how many buyers/sellers should there by?
for perf comp to exist, products must be perf substitutes of each other
what does standardized product have to do with perf comp?
Corn (commercial vs. organic)
what is an example of standardized product?
for perf comp to exist, producers can enter the market when its most profitable/exit when its unprofitable
in freedom to enter/exist, what flexibility do producers possess that correlates with profitability?
for perf comp to exist, buyers must not work together to get a brighter price and sellers to make more money
in independent buyers/sellers, what must buyers not do?
for perf comp to exist, buyers should know the prices of the diff sellers and sellers should know the diff prices of other competitors and a seller will know what the buyer is willing to pay
in well-informed buyers/sellers, what do both sellers and buyers need to know?
when a market structure does not meet the 5 characteristics for a perf comp (not all 5 have dont have to be met, it can be 1 that makes it imperf comp)
how is imperf comp created?
ex: corn->production/sale of corn is an ex. or imperf. comp. b/c the US gov't gives corn farmers a subsidy to keep their prices up
what is an example of imperf coomp?
ex: beef- caddle ranchers, similar to corn farmers are close to being part of a perf comp but are an ex. of imperf comp b/c each seller tries to convince the buyers that their product is better and many times sellers combine together to control market price
how is beef an example of an imperf comp?
a monopoly exists when there is only 1 seller of a specific product and there are no close substitutes
when does a monopoly exist?
when sellers organize together and agree on prices and production limits
what do sellers do to set up a monopoly?
in a monopoly, there are no close substitutes so they're price makers and competition faces barriers to entry
what doesn't exist in a monopoly?
only 1 seller; restricted, regulated market- gov't controls black market, control of prices
what are the characteristics of a monopoly?
(4) natural monopoly, gov't monopoly, technological monopoly, geographic monopoly
how many monopolies exist and what are they called?
(b) natural monopoly
(type of monopoly) this exists w/ categories such as public utilities
natural monopolies exist when production costs are the lowest when there is one producer
when do natural monopolies exist?
(type of monopoly) when gov't owns/runs business w/ one producer such as US postal service
(b) technological monopoly
inventor receives a patent, the time period that they're the only producer creates a monopoly
(b) geographic monopoly
(type of monopoly) when there's only one producer of a product in a specific region of the country, such as a prof. sports team
monopolistic competition is when many sellers are selling a similar but not exact product to many buyers
what is monopolistic competition?
monopolistic competition competitive b/c there are many buyers & sellers but its monopolistic b/c each seller influences a portion of the market
how is monopolistic competition competitive?
in a monopolistic comp, sellers will make slight adjustments to their products to make it seem diff or slight changes in advertisements
what is product differentiation?
many sellers/buyers, similar but differentiated products, limited control of prices, freedom to enter/exit the market
what are the 4 characteristics of a monopolistic competition?
in monop comp, the many sellers of the similar products cannot change their prices much (also, there are many substitutes)
what does it mean to have a limited control of prices?
(b) exist when the market has a few sellers and many buyers and it exist b/c start up cost is very expensive compared to monopolistic comp so its harder to enter
what is an oligopoly?
few sellers/many buyers, standardized/differentiated products, have more control over their prices- b/c they have fewer sellers, little freedom to enter/exist the market
what are the 4 characteristics of an oligopoly?
control a business's means of productions and ale thru regulations (laws)
what does a gov't organization control?
to stop monopolies and trusts from forming
why does anti-trust legislation exist?
two gov't organizations who is responsible for regulating businesses
what does the fed state commission and dept of just do?
they evaluate all potential mergers to make sure the merger will not make it too difficult for other firms to enter the market
how do the fed state commission and dept of just get involved with mergers and oversee them?
b/c no one seller can control the price but must accept the market price as determined by the forces of supply and demand
why are sellers in a perfectly competitive market known as price takers?
b/c differentiated products would allow comp on a basis other than price
why is it necessary to have standardized products in order to have perf comp?
if buyers/sellers banded together they could interfere with the interaction of supply and demand determining prices
why is independent action of buyers and sellers important to achieving perf comp?
imperf comp lacks one or more of the characteristics of perf comp
how is imperf comp different from perf comp?
natural monopolies arise because economies of scale make it most efficient for a single company to provide a particular service
what is the relationship between economies of sale and a natural monopoly?
a patent gives one company exclusive property rights over an invention or technology and keeps other companies from entering that market
how does a patent awarded to one company act as a barrier to entry to another company wishing to enter the same market?
a monopolist is a price maker because the company has no competition and controls the price in the market by controlling supply
why is a monopolist a price maker rather than price taker?
b/c patents expire or a competing technology comes along
why do technological monopolies exist only for a limited time?
in perf comp and monopo comp, there are many buyers and sellers and freedom to enter or exit the market. in perf comp and monopoly, sellers have control over the price of their particular product, although comp limits that control
how is monop comp similar to perf comp and how is t similar to monopoly?
advertising, packaging, services, guarantees, brand names
describe some of the techniques sellers use to differentiate their products?
in industrial oligopolies, sellers compete on service or other non-product related grounds
why are standardized products sometimes found in an oligopoly but not in monopolistic competition?
monopo comp, b/c there are usually high start-up costs or other barriers to entry in an oligopoly
is it easier for a new firm to enter the market under monopolistic comp or oligopoly? why?
to regulate monops and prevent monopos from forming in the future
what is the main purpose of antitrust legislation?
firms agree to not compete with one another in certain markets
how does market allocation lead to reduced comp?
when it wants a firm to stop using an unfair business practice
when would the gov't issue a cease and desist order?
by providing product info that is necessary for consumers to make informed purchasing decisions or to alert them to safety concerns or unfair business practices
how do public disclosure requirements protect consumers?
the level of comp
What determines the difference between one
market structure and another?
b/c real markets lack one or more of the characteristics of perf comp (usually by having few sellers or nonstandardized products)
Why is perfect competition not found in real
by limiting supply
How does a monopoly control the price of its
number of sellers (One vs. several); sellers' control over prices (none vs. significant); barriers to market entry (restricted vs. free)
Name three ways in which a monopoly differs
from perfect competition.
b/c product differentiation gives a firm limited control over price (otherwise it would be just like perf comp)
Why is product differentiation necessary for monopo comp?
b/c there are so few firms and each one has a larger enough market share that its actions affect all other firms in the oligopoly
why are firms in an oligopoly less independent in setting prices than firms in monopolistic comp?
whether the merger will decrease comp or make it harder for new firms to enter the market
what factors does the gov't consider in deciding whether to approve a merger?
b/c deregulation fosters efficiency and increase competition, which causes companies to differentiate and results in lower prices for consumers
why do economists generally favor deregulation of most industries?
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