1. Market Structures
Academic Decathlon—Lesson 10
Berryhill Economics

2. Market Structures
 Laissez Faire—philosophy that the
government should not interfere with
commerce or trade (French term meaning
“allow them to do”)
 Adam Smith’s theory that government is
only to protect private property, enforce
contracts, settle disputes, and protect
domestic companies from foreign
competitors

3. Market Structures
 Wealth of Nations, written by Adam Smith
in 1776, enforced this Laissez Faire policy
and the U.S. adopted many of its
economic ideas and the government
played a small (if any) roll in the market of
good and services
 By the 1800s, however, competition was
weakening

4. Market Structures
 Due to mergers and acquisitions, many small
firms in an industry were combined into few very
large businesses
 This is when government started stepping in and
regulating the market more
 The government tries to keep competition active
in most markets, but there are a number of
different types of markets classified according to
the conditions that prevail in them

5. Market Structure
 Market structure—the nature and degree
of competition among firms in the same
industry

6. Perfect Competition
 Perfectcompetition—large number of well
informed independent buyers and sellers
whom exchange identical products
 Example: local vegetable farming
 Necessary Conditions:
 Large number of buyers and sellers; no single
buyer or seller is large enough or powerful
enough to affect price

7. Perfect Competition
 Necessary Conditions (cont.)
 Buyers and sellers deal in identical products
 Each buyer and seller acts independently—
this competition is one of the forces that keep
prices low
 Buyers and sellers are reasonably well-
informed about products and prices
 Buyers and sellers are free to enter
into, conduct, or get out of business

8. Perfect Competition
 Market forces of supply an demand
establish the equilibrium price.
 The perfectly competitive firms operate
where marginal cost = marginal revenue;
there profits are maximized.

9. Perfect Competition
 Few, if any, perfectly competitive markets
exist, but local vegetable farming comes closest.
 Imperfect competition is the name given to a
market that lacks one or more of the conditions
of perfect competition; most firms in the U.S. fall
into the imperfect competition classification.
 Perfect competition is still important because
economists use it to evaluate other market
structures.

10. Monopolistic Competition
 Monopolistic competition--market structure
that has all the conditions of perfect
competition EXCEPT for identical products
 Example: Athletic shoe industry
 Non-price competition—the use of
advertising, give-aways, or other
promotional campaigns to convince buyers
that the product is somehow better than
another brand

11. Monopolistic Competition
 Product differentiation—real OR imagined
differences between competing products
in the same industry
 If a firm can differentiate a product in the
mind of the buyer, the firm can raise its
price.
 Profit is again maximized where MC=MR

12. Oligopoly
 Oligopoly—a market structure in which a
few very large sellers dominate the
industry
 Product may be differentiated (like the
auto industry) or standardized (like the
steel industry).
 Examples: soft drinks, airlines, fast food,
autos

13. Oligopoly
 Because oligopolists are so large,
whenever one firm acts, the other firms
usually follow.
 This is called interdependent behavior—
prices tend to move together across the
industry.
 Another type of interdependent behavior is
collusion—a formal agreement to set
prices or to cooperate in some manner.

14. Oligopoly
A type of collusion is price fixing—
agreeing to charge the same or similar
prices for a product.
 Firms can also collude to divide the market
so all are guaranteed to sell a certain
amount.
 Because collusion usually restrains trade
and fair competition, it is illegal.

15. Oligopoly
 Because prices within an oligopolistic
market tend to move together, most firms
tend to compete on a nonprice basis with
advertising or other product differentiating.
 Oligopolists maximize profits where
MC=MR.

16. Monopolies
 Monopoly—market structure with only one
seller of a particular product
 Very few monopolies exist in the U.S.
because of anti-trust laws—laws that
outlaw monopolies.

17. Types of Monopolies
 Natural monopoly—a market situation where the
costs of production are minimized by having a
single firm produce the product. Examples:
telephone companies in one area, public utilities
 Justification for a natural monopoly is economies of
scale—a situation in which the average cost of
production falls as the firm gets larger
 Geographic monopoly—a monopoly based on
the absence of other sellers in a certain
geographic area. Example: gas station on a
lonely highway

18. Types of Monopolies
 Technological monopoly—a monopoly
based on ownership or control of a
manufacturing method, process, or other
scientific agreement. Example:
companies with patents or copyrights
 Government Monopoly—a monopoly the
government owns and operates.
Examples: uranium, water use, etc.

19. Monopolies
 Monopolies are price makers—they do not
rely on supply and demand to set the
market price (because they are the only
supplier).
 Monopolies will charge more for its
product if not regulated, but it will still
operate at the profit maximizing point of
MC=MR.