Chapter 6: Perfect and Imperfect Competition. Section A Perfect Competition Consumers look for best...
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Transcript of Chapter 6: Perfect and Imperfect Competition. Section A Perfect Competition Consumers look for best...
Chapter 6: Chapter 6: Perfect and Perfect and Imperfect Imperfect
CompetitionCompetition
Section A Section A Perfect CompetitionPerfect Competition
Consumers look for best priceConsumers look for best price For profit, firms must:For profit, firms must:
Cut costsCut costs Increase salesIncrease sales
DiversificationDiversification Sell different productsSell different products Reduces fixed costsReduces fixed costs Real world examples??Real world examples??
Market as a RegulatorMarket as a Regulator
Too many firmsToo many firms Low profitsLow profits Less efficient firms closeLess efficient firms close ““invisible hand”invisible hand”
Fewer firmsFewer firms Higher profitsHigher profits More firms enter marketMore firms enter market
Low Prices in competitive marketLow Prices in competitive market
Section B MonopoliesSection B Monopolies
Perfect MonopolyPerfect Monopoly Only supplier, no close substitutesOnly supplier, no close substitutes Consumers have no choiceConsumers have no choice Charge any priceCharge any price Very profitableVery profitable
Imperfect competitionImperfect competition Large companies have most control Large companies have most control
over prices.over prices. 3 Types3 Types
Monopolistic CompetitionMonopolistic Competition Many producers for similar productsMany producers for similar products Advertising, Branding, Perceived qualityAdvertising, Branding, Perceived quality Ex. soapEx. soap
OligopolyOligopoly Few producersFew producers Similar products, prices, policiesSimilar products, prices, policies Work like a one monopolyWork like a one monopoly
U.S. Auto makersU.S. Auto makers Natural monopolyNatural monopoly
Large capital investments (fixed costs)Large capital investments (fixed costs) Inefficient to have more than one producerInefficient to have more than one producer Utilities (natural gas, electricity)Utilities (natural gas, electricity) Regulatory agenciesRegulatory agencies
Protect public from abuseProtect public from abuse
Combinations and Big Combinations and Big BusinessBusiness
Small business vs. Big BusinessSmall business vs. Big Business What are the advantages of both?What are the advantages of both?
Horizontal CombinationHorizontal Combination
Joining of similar firms Joining of similar firms
Vertical CombinationVertical Combination
Joining of different steps/levelsJoining of different steps/levels
Advantages/Advantages/Disadvantages of Big Disadvantages of Big
BusinessBusiness AdvantagesAdvantages
Economies of scaleEconomies of scale Efficiency related to large sizeEfficiency related to large size
Bulk buyingBulk buying
DisadvantagesDisadvantages Diseconomies of scaleDiseconomies of scale
Inefficiency related to sizeInefficiency related to size Less personal serviceLess personal service
Costs and Benefits from Costs and Benefits from a Monopolya Monopoly
What are the advantages and What are the advantages and disadvantages of Microsoft’s disadvantages of Microsoft’s dominance in software industry?dominance in software industry?
The Government’s Role The Government’s Role in Competitionin Competition
Workable competitionWorkable competition Balance between benefits of large firms Balance between benefits of large firms
and competition.and competition. Anti-trust PolicyAnti-trust Policy
Sherman Anti-trust Act of 1890Sherman Anti-trust Act of 1890 Outlawed monopolistic behaviorOutlawed monopolistic behavior
Fines or forced splitFines or forced split
Today: Focus on price-fixing Today: Focus on price-fixing agreementsagreements