MIC - Market Structures Lesson

Market Structures

A picture of a female farmerWhen looking at markets, economists look at several factors. How many suppliers are there?  Do the firms have any influence over price? Are the products identical or differentiated? Is it easy or difficult for new firms to enter the market?

The answers to the above questions help to determine market structure or the nature and degree of competition among firms operating in the same industry. Economists have come up with names for the different markets that exist in the United States.

Pure (Perfect) Competition

  • Number of sellers: Many
  • Product differentiation: None; products are identical (perfect substitutes)
  • Barriers to Entry: None; easy for firms to enter and exit the industry
  • Price Control: None; firms are known as “Price Takers” with no control over price
    • Price determined by the market
  • Examples: Vegetable and fruit farmers, wheat

Monopolistic Competition

  • Number of sellers: Many
  • Product Differentiation: Some; similar but not identical products
    • Use a lot of non-price competition like advertising
  • Price control: Little control over price
  • Barriers to Entry: Low; easy to enter and exit the market
  • Examples: Jeans, books

Oligopoly

  • Number of sellers: Dominated by a few large, profitable firms
  • Product Differentiation: Some to none; products can be differentiated or identical
  • Barriers to Entry: High; difficult to enter market
  • Price Control: Some; firms must pay attention to what the others are doing and can collude to fix prices
    • Cartels like OPEC set prices and production levels for the entire market
  • Examples: Cars, movie studios, airlines

Monopoly

  • Number of sellers: One
  • Product Differentiation: Unique good with no close substitutes
  • Barriers to Entry: Complete; new firms CANNOT enter the market
  • Price Control: Complete; firm is a “Price Maker”
    • Largest profit to price ratio
  • Ex: Georgia electric companies, NFL, robber barons

Market Structures Graphic Organizer Practice

Market Structures Vocabulary Practice

Sweet Opportunities Practice

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