Chapter 7 Notes INCOMPLETE
By Sarah Madeline in ECONOMICS NOTES (Files) · Edit Doc
Submarket in a market economy
Perfect competition - large number of firms produce the same product.
This is not common in a fre market system.
For perfect competition to exist, these four things have to be present:
1. Many buyers and sellers - no single firm or customer can dictate price or distribution. one person can not negotiate price. There are some exceptions and this is one of them: Let's say you have a company that makes tv's. Your company is called The TV People. Big companies, such as Walmart, can make a deal with The TV People that states that Walmart can sell the TV's for a price lower than what The TV People would have sold it for. They can do this because Walmart knows that if they sell it with a low price, they will get more customers in the store to buy more tvs and thus gain more profit. The TV People agree to this because Walmart has to give them a certain amount of the profit they make and if walmart is selling for a low price, more people are buying, and walmart will have to keep buying TV's from the TV People and so this is a win-win situation.
2. Sellers Offer identical products - there is absolutely no variation in the make-up of the product, the color and all other parts to the product. to have this happen, there also has to be no major variation in product regardless of where you are buying it from. For example, gasoline.
3. Buyers and sellers are informed about the product -- this is required so the producers and the consumers are not going to get ripped off -- knowing who you are buying from and who you are selling to is a must. informed people know who is selling it and for how much. informed producers know who is willing to buy it for how much.
4. Sellers are able to enter and exit the market freely -- it has to be easy to enter the market and easy to leave the market.
Barrier to entry -- something, such as cost or the need for a specialized work team, that makes it difficult to start a business
Monopoly - one firm controls the whole industry.
This is very rare in the free market system. Mostly because it's illegal but also because it is costly.
The cons to a monopoly: a monopoly forces prices to rise, production is limited and because they offer no alternative product.
How do they start? The high barrier of entry makes a monopoly easy to form. I mean, you don't see monopolies starting over small things like toothbrushes or pencils or even cars.
Monopolies are able to mass produce, so prices are able to be lowered and since you can produce as much as you want, you don't have any competition.
You also sometimes get something called a corporate monopoly, these are also illegal, but they sometimes happen. Take standard oil (which was a monopoly that started on purpose) and micorsoft (and accidental monopoly). They both had the same end result (a monopoly formed). Rockerfeller purposely set out to undercut the competition, so he could control the oil business, bill gates on the other hand, when looked at from an economic perspective, was economically sound, which means that it makes sense in the eyes of the economy.
You also sometimes get a natural monopoly, which is where it makes sense to only have one firm. This type of monopoly is allowed by the government, but not privately owned, the company that has the control is owned by the state or the government. For example, city waterways. Changes in technology can cause a natural monopoly to break up and cause comepetition. For example, electricity companies and telephone companies.
The next type of monopoly is a government monopoly, which is a government created monopoly. For example, patents. These give ownership of a certain idea to one company.
Monopolistic competition - this is closer to perfect competition than to a monopoly. It involves most stores that we are used to, consumers have semi-control over price, there is a difference in product. Monopolistic competition is a happy medium between perfect competition and a monopoly. Because there is a variation in product, suppliers can differentiate the price of goods.
Monopolies aren't allowed partly because they mean no competition and competition is good because it drives innovation.
Oligopoly - few (2 or more) firms dominate the market. Example -- airlines and energy companies. The high barrier to entry allows for a few companies to be in existance but not so many that it's anyone's game. The government has to make sure that a collusion does not occur. A collusion is when the companies in the oligopoly get together to set the prices. A cartel is the formal agreement between the companies that states that they will cooperate on prices.
Franchise - right to sell a good or service within a certain market
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