Standard Address
 12.1 Students understand common terms
& concepts and economics reasoning.
7.1 - Objectives
 Distinguish the features of perfect competition.
 Describe the barriers to entry that can create a
monopoly.
 Compare the market structures of monopoly
and perfect competition in terms of efficiency.
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CHAPTER 7
Market Structure
7.1 Perfect Competition and Monopoly
7.2 Monopolistic Competition and Oligopoly
7.3 Antitrust, Economic Regulation, and
Competition
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Consider
CHAPTER 7
Market Structure
 What does a bushel of wheat have in common with a
share of Microsoft stock?
 What’s so perfect about perfect competition?
 Why don’t most monopolies last?
 Why are some panty hose sold in egg-shaped cartons?
 Why was OPEC created?
 Is the U.S. economy more competitive now than it used
to be?
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LESSON 7.1
Key Terms
Perfect Competition
and Monopoly
 market structure
 perfect competition
 commodity
 monopoly
 barriers to entry
 market power
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Perfect Competition
Market structure—important features of a
market, including the number of buyers and
sellers, product uniformity across sellers, ease
of entering the market, and forms of competition
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Perfect Competition
Perfect competition—a market structure with
many fully informed buyers and sellers of an
identical product and ease of entry
Many buyers and sellers
Firms produce standardize products
A commodity is a product that is identical across producers
Buyers are fully informed as well as sellers
Firms can enter or leave the market easily.
There are no obstacles preventing new firms from entering
the market.
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Example Markets
Share of large corporations
Foreign exchange
Agricultural products
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Market Structure
Market Feature
Questions to Ask
1.Number of buyers
and sellers
Are there many, only a few, or just one?
2.Product’s uniformity
across suppliers
Do firms in the market supply identical
products, or are products differentiated
across firms?
3.Ease of entry into the Can new firms enter easily, or do natural or
market
artificial barriers block them?
4.Forms of competition
among firms
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Do firms compete based only on prices, or
are advertising and product differences also
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Market Price
The market price is determined by the
intersection of the market demand curve
and the market supply curve.
In LARGE MARKETS each firm is so
small relative to the market that each has
no impact on the market price.
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Market Equilibrium
and a Firm’s Curve
in Perfect Competition
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Checkpoint: pg. 193
What are the features of perfect
competition?
 The Features of perfect competition are:
(1) There are many buyers and sellers.
(2)Firms produce a standardized product or
commodity.
(3) Buyers are fully informed about the price, quality,
and availability of products, and sellers are fully
informed about all resources and technology.
(4) Firms can easily enter or leave the industry.
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Monopoly
Monopoly is the sole supplier of a
product with no close substitutes.
Is the extreme opposite of the competition
structure.
Market power is the ability of a firm to
raise its price without losing all sales to
rivals.
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Barriers to Entry
Essay
There are three types of barriers:
Legal restrictions
Economies of scale
A monopoly that emerges from a nature of costs is
called a natural monopoly.
A new entrant cannot sell enough output to experience
the economies of scale enjoyed by an established
natural monopoly.
Therefore entry is naturally blocked.
Geographic monopolies - the only store in town.
Control of essential resources
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Monopolists
May Not Earn a Profit
Although a monopolist is the sole
producer of a good with no close
substitution, the demand for that good
may not be great enough to keep the firm
in business.
Even a monopoly with iron-clad barriers to
entry may go broke.
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Monopolists
May Not Earn a Profit
Even a monopoly with iron-clad barriers to
entry may go broke.
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True Monopolies Are Rare
A long lasting monopoly is rare because
a profitable monopoly attracts
competitors and substitutes.
Examples
Railroads—trucking industry
Local cable TV providers and local phone
services—wireless transmission of longdistance telephone calls
U.S. Postal Service—fax machines, e-mail,
the Internet, FedEx
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Checkpoint: pg. 196
Name and describe the three barriers to
entry into a market?
 The barriers to entry into a market
are:
Legal restrictions
Economies of scale
And control of essential resources.
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Monopoly and Efficiency
Not guaranteed a profit
Can lose money
Relatively rare
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Monopoly Versus
Perfect Competition
Competition forces firms to be efficient and to
supply the product at the lowest possible price.
A monopoly will charge a higher price than
competitive firms.
With monopoly, consumer surplus shrinks, and
is much smaller than consumer surplus with
perfect competition.
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Monopoly, Perfect Competitor,
and Consumer Surplus
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Other Problems
with Monopoly
Resources wasted securing monopoly
privilege
Monopolies may grow inefficient
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Monopoly Might
Not Be So Bad
Economies of scale
Government regulation
Keeping prices low to avoid regulation
Keeping prices low to avoid competition
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Checkpoint: pg. 198
How does monopoly compare to perfect
competition in terms of efficiency?
 Monopolies, insulated from rigors of
market competition, could grow
inefficient – unlike perfect
competition, which is always perfect.
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