economics 101

By: Serenity HughesECONOMICS 101

The markets for many important products are dominated by a small number of very large firms.

IMPERFECT COMPETITION

Objective- maximize their economic profits.

Downward sloping curve

MARKET POWER- firms that face a downward sloping demand curve.

They have the ability to choose market prices instead of taking prices as given.

IMPERFECTLY COMPETITIVEMARKETS WITH ONE OR ONLY A FEW SUPPLIERS

An extreme situation of a single supplier.

MONOPOLY

1. The Ownership of a Key Resource2. Government- Created Monopolies3. Natural Monopolies

BARRIERS TO ENTRY- PREVENT COMPETITORS FROM ENTERING THE

MARKET

Sherman Anti-Trust Act of 1890- an act passed to reduce the impact of monopoly. Increase Market Competition

WHAT CAN THEY DO????- Large mergers and acquisitions must be reviewed

by government regulators- Break up companies

DEALING WITH MONOPOLIES

By changing different prices- the marginal revenue curve would be identical to the

market demand curve, and it would choose to supply a quantity equivalent to the competitive market outcome.

Price discrimination (PD) further increases monopoly to capture a greater fractionof the benefits produced by each transaction.

PD increases social welfare by moving the market closer to the socially efficient quantity.

PRICE DISCRIMINATION- CHARGING DIFFERENT CUSTOMERS WITH DIFFERENT

PRICES .

Market with only a few sellers Downward sloping demand curve

Cartel- an agreement to cooperate and behave like a monopolist so total industry profits canbe maximized= illegal in US.

OLIGOPOLY

MC- combine aspects of the perfectly competitive and monopoly models.

Downward sloping demand curve due to the product of each firm being differentiated.

IMPERFECT COMPETITION- MONOPOLISTIC COMPETITION

Competitive markets will fail to produce socially desirable outcomes. 1. Externality- arises when the actions of one person affect

the well being of someone else, but neither party pays nor is paid for these effects.

BENEFICIAL- POSITIVE EXTERNALITY CAUSES HARM- NEGATIVE EXTERNALITY

MARKET FAILURE

There will be too little of an activity that generates positive externalities and too much of an activity that generates negative externalities.

EXTERNALITIES CONT.