Economics Principles and Practices © 2012 Georgia

Chapter 7: Market Structures

Chapter Overviews

Section 1: Competition and Market Structures

Market structure is the nature and degree of competition among firms doing business in the same industry. Competitive markets represent an ideal situation not always found in the economy. The idea of perfect competition is based on large numbers of buyers and sellers, identical products, independent action by market participants, reasonably good information about market conditions, and the freedom to enter or leave the market. Imperfect competition occurs when any of the conditions for perfect competition are not met. There are three forms of imperfect competition: monopolistic competition, which has all the characteristics of perfect competition except for product differentiation; oligopoly, which is a market structure dominated by a few very large firms; and monopoly, which is a single producer with the most control over supply and price. All profit-maximizing firms, regardless of their market structure, maximize profits by equating the marginal cost of production with the marginal revenue from sales.

Section 2: Market Failures

There are five common forms of market failures. The first is inadequate competition, which can lead to oligopolies or monopolies. The second is inadequate information, which denies people an awareness of better prices or opportunities in other markets. The third is resource immobility, which occurs when factors of production cannot or refuse to move to other markets. The fourth is the failure of the market to provide public goods. The fifth is the presence of externalities, positive or negative economic side effects to uninvolved third parties.

Section 3: The Role of Government

The role of government has expanded to preserve competitive markets. This has taken the form of antitrust legislation that outlaws trusts and various forms of price discrimination. As a result, the economy has been modified so that it is now a mixture of different market structures, different forms of business organizations, and some degree of government regulation.

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