AOF
Business Economics
Unit 3, Lesson 9
Competition
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Economics looks at characteristics and outcomes
when considering competitive markets
Characteristics
• Large # of buyers and
sellers
• Products are alike
• Low or no barriers to entry
Similar products and
lots of choices
Outcomes
• The market sets prices.
• There are zero profits.
• Consumers get low prices.
• It is economically efficient.
What economic forces are at work here?
There’s no economic profit in a perfectly
competitive market
• If a firm begins to make
profit, competitors soon
enter to take a piece of
the pie.
• Competition lowers the
price until it just covers
the costs.
More competitors means lower
profits for each firm
With no profit, how can firms continue to exist?
There are advantages to a highly competitive market
• It’s efficient: Society’s
resources are used well
to produce the products
customers want.
• Firms have to operate at
the lowest possible perunit cost.
• Consumers get the
lowest possible price.
Who benefits more from a competitive market: consumers
or producers?
There are disadvantages to a highly
competitive market
• No money for research
and development
• The market doesn’t
consider social costs and
benefits, such as:
o Smoke from packing
facility pollutes the air
o Pleasant looking avocado
trees benefit neighbors
Is this a good trade-off for lower prices?
Monopolies share certain attributes
Characteristics
• Single seller
• A unique
product with
no close
substitutes
• Price maker
Outcomes
• Maximized profits
through limited
production and
high prices
• No new
competition
• Inefficient use of
resources
What are possible barriers to entry?
Monopolies have some advantages to the consumer
• Monopoly profits can be used to pay for research
and development.
• Under some circumstances, monopolies are more
economically efficient than alternatives.
High fixed costs +
low marginal costs =
Extreme economies of
scale
Who benefits more from a
monopoly: producers or
consumers?
Monopolies also have disadvantages
Price is generally higher, and
quantity lower:
• Less is produced.
• Price can be very high.
Often economically inefficient:
• Consumers are unable to pay
more than the full cost of
production.
• Firms willing to produce at a
lower price can’t do so.
Why does a monopoly have limited incentives to produce more?
Patents create monopolies
• Patents grant firms an
exclusive right to a new
product, technology, or
process, for a period of
time.
• Monopoly profits provide an
incentive to invest in
research and development
(R & D).
Do you think illegal downloading of songs is like a patent
infringement?
Are monopolies good or bad?
Good
• Monopolies result in
more R & D.
• Patents reward the
entrepreneurial
innovation.
Bad
• Higher prices and fewer
goods are produced.
• Consumers pay higher
prices.
• Barriers to entry lead to
inefficiencies.
Are the economic costs of creating a monopoly worth the
benefits of R&D?
Markets are constantly shifting
Markets change for many reasons,
including:
• New products are
invented, which makes
old ones obsolete.
• Government
regulations change the
playing field.
• Consumer needs and
tastes change.
• The cost of resources
rises or falls.
The business economist
must understand local and
global economic shifts.