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any industry to keep the market to themselves.
exists between firms? What kind of product is
Producers have to keep prices competitive or new
involved”is everyone trading the exact same
firms can take away some of their business.
product, or are they simply similar? Is it easy or
difficult for new firms to enter the market?
The answers to these questions help determine
Perfect Competition and
market structure, or the nature and degree of
Profit Maximization
competition among firms operating in the same
industry. Economists group industries into four Under perfect competition, each individual firm is
different market structures”perfect competition, too small to influence price. Therefore, the firm
monopolistic competition, oligopoly, and views demand differently than the market does. In a
monopoly. perfectly competitive market, supply and demand set

164 UNIT 2 MICROECONOMICS
the equilibrium price. Then, each firm selects a level Panel B in Figure 7.1 shows this same information
of output that will maximize its profits at that price. graphically. For example, the firm™s marginal cost
The relationship between an individual firm and (MC) for producing the 110th unit of output was
the entire industry under perfect competition is $4.50. Because this unit could be sold in the market
shown graphically in Figure 7.1. In Panel A, the mar- for $15, the firm made a profit of $10.50. When the
ket forces of supply and demand set the equilibrium firm added the seventh worker, total output rose to
price at $15. This price, as shown in Panel B, now 129 units, and marginal costs rose to $4.74”thereby
becomes a horizontal demand curve facing each per- earning additional profits for the firm.
fectly competitive firm. Because the firm receives $15 The eighth worker helped increase total output to
for every additional unit it makes, the demand curve 138 units. This was also profitable since the marginal
is the same as the marginal revenue (MR) curve. cost of producing 138 units was less than the mar-
Panel B also shows the cost and revenue infor- ginal revenue from the sale of those products. When
mation for the firm presented earlier, in Figure 5.6 the firm hired the ninth worker, however, marginal
on page 128. This firm, as you may recall, also cost was exactly equal to marginal revenue, so at this
received $15 for every unit of output sold”which is point the firm would stop hiring labor and maintain
why the price is the same as the marginal revenue production at 144 units. Had the firm hired the
shown in the second-to-last column. When the tenth variable input, increasing total output to 148
firm wanted to maximize its profits, it did so by units, total profits would have gone down because
finding the level of output that equated its mar- the $22.50 marginal cost of production was larger
ginal cost with its marginal revenue. than the $15 marginal revenue.


ECONOMICS
Figure 7.1
AT A GLANCE
AT A GLANCE

Perfect Competition: Market Price and Profit Maximization
B Individual Firm
A Market
Price Revenue/
Cost
S
D
Profits are
maximized where
$25.00
MC
MR = MC
$22.50 Subtractions
The equilibrium
from profit
market price
Price = $15 = D = MR
15.00
Additions to profit
10.00

D
5.00
4.74
4.50
S
110 129 138 144 148
Quantity


Using Graphs Under perfect competition, the market forces of supply and demand establish the
equilibrium price. The perfectly competitive firm treats this price as its demand curve and its
marginal revenue (MR) because the firm will receive $15 for each and every unit it sells. Is perfect
competition always a theoretical situation? Explain.


CHAPTER 7: MARKET STRUCTURES 165
The profit maximizing quantity of output is found Although perfect competition is rare, it is impor-
where the marginal cost of production is equal to the tant because economists use it to evaluate other
marginal revenue from sales, or where MC = MR. market structures. Imperfect competition is the
This occurs at 144 units of output, shown in both name given to a market structure that lacks one or
Figure 5.6 and Panel B of Figure 7.1. Other levels of more of the conditions of perfect competition.
output may generate the same amount of profits, but Most firms and industries in the United States
none will generate more. today fall into this classification, which has three
categories”monopolistic competition, oligopoly,
and monopoly.
A Theoretical Situation
Few, if any, perfectly competitive markets exist,
Monopolistic Competition
although local vegetable farming (“truck” farming)
comes close to satisfying all five conditions. In Monopolistic competition is the market
these markets many sellers offer nearly identical structure that has all the conditions of per-
products. Individual sellers are unable to control fect competition except for identical products. By
prices, and both buyers and sellers have reasonable making its product a little different, the monopo-
knowledge of products and prices. Finally, anyone listic competitor tries to attract more customers
who wants to enter the business by growing toma- and monopolize a small portion of the market.
toes, corn, or other products can easily do so.

Product Differentiation
In contrast to perfect competition, monopolistic
competition utilizes product differentiation”real
or imagined differences between competing prod-
ucts in the same industry. Most items produced
Market Researcher
today”from the many brands of athletic footwear
to personal computers”are differentiated. The dif-
Can you organize and
ferentiation may even be extended to store loca-
evaluate data? Can you be
tion, store design, manner of payment, delivery,
impartial when you com-
packaging, service, and other factors.
pile your findings?
Sometimes differences between products are
The Work real. For example, some brands of athletic footwear
Market researchers gather, have special shock-absorbing soles. Others have
record, and analyze facts certain construction materials to reduce weight.
about products and sales. Some are just designed to look more appealing, or
Information may be gathered from company or govern- are linked to star athletes.
ment records, published materials, statistical files, and
other sources. Researchers often print and circulate ques-
Nonprice Competition
tionnaires, or survey people over the phone or door-to-
door. The information is used to prepare forecasts of Monopolistic competitors want to make con-
future sales trends, offer recommendations on product
sumers aware of product differences. Nonprice
design, and define the market toward which advertising
competition”the use of advertising, giveaways, or
should be directed.
other promotional campaigns to convince buyers
Qualifications that the product is somehow better than another
brand”often takes the place of price competition.
Strong analytical and writing skills and experience with
Therefore, monopolistic competitors usually adver-
computerized data are essential. Courses in marketing,
tise or promote heavily to make their products
statistics, English composition, speech, psychology, and
seem different from everyone else™s.
economics are required.

166 UNIT 2 MICROECONOMICS
dominates the vast soft drink market across the
Chinese continent after creating an improved name
MARKETING IN CHINA meaning “delicious, enjoyable and makes you
happy.”
An important part of any product is its name. It PepsiCo, Inc., came up with “everything makes
must convey what the producers intend. you happy” to capture market share for Pepsi. . . .
Potential exporters must understand cultural ”Alcinda Hatfield, Foreign Agricultural Service, July 1999
characteristics when considering brand manage-
ment. Because the Chinese continue to favor names
that convey goodness, luck, happiness, long life,
Critical Thinking
prosperity or historical significance, it is sometimes
difficult to translate a Western brand name into 1. Making Generalizations Why is it some-
Chinese. times difficult to translate a brand name
The Coca-Cola Company took 11 years to make into a name acceptable to people in
a profit, in part due to an ill-advised brand name, another country?
after it came back to China in 1979. Today, Coke
2. Categorizing Information What part does
the brand name and labeling of a product
play in product differentiation?

This explains why producers of designer jeans In time, both the number of firms in an industry
spend so much on advertising and promotion. If and the supply of the product becomes fairly stable
the seller can differentiate a product in the mind of with no great profits or losses.
the buyer, the firm may be able to raise the price
above its competitors™ prices.
Oligopoly
Monopolistic Competition and Profit Oligopoly is a market structure in which a
few very large sellers dominate the industry.
Maximization
The product of an oligopolist may be differenti-
Under monopolistic competition, similar prod-
ated”as in the auto industry, or standardized”as in
ucts generally sell within a narrow price range. The
the steel industry. The exact number of firms in the
monopolistic aspect is the seller™s ability to raise
industry is less important than the ability of any
the price within this narrow range. The competitive
single firm to cause a change in output, sales, and
aspect is that if sellers raise or lower the price
enough, customers will forget minor differences
and change brands.
The profit maximization behavior of the monop-
olistic competitor is no different from that of other
firms. The firm produces the quantity of output Competing in the Market On an average shopping
where its marginal cost is equal to its marginal rev- trip, a consumer™s eye lingers on a product for only
enue. If the firm convinces consumers that its prod- about 2.5 seconds. In order to stay competitive,
companies experiment with new formulas, along
uct is better, it can charge a higher price. If it cannot
with the color and size of the product™s packaging.
convince them, the firm cannot charge as much.
These research and development costs can range
The monopolistic competitor can enter the
from $100,000 for adding a new color to an existing
market easily. The possibility of profits draws new
product line to millions of dollars for the creation of
firms, each of which produces a product only a a new product.
little different from the ones already on the market.

CHAPTER 7: MARKET STRUCTURES 167
prices in the industry as a whole. Because of these other airlines generally match the lower prices in a
characteristics, oligopoly is further from perfect matter of days, if not hours. Each oligopolist knows
competition than is monopolistic competition. that the other firms in the industry have consider-
In the United States, many markets are already oli- able power and influence. Therefore, firms tend to
gopolistic, and many more are becoming so. Pepsi act together.
and Coke dominate the soft drink market. Sometimes the interdependent behavior takes the
McDonald™s, Burger King, and Wendy™s dominate form of collusion, a formal agreement to set prices or
the fast-food industry. A few large corporations dom- to otherwise behave in a cooperative manner. One
inate other industries, such as the domestic airline, form of collusion is price-fixing”agreeing to charge
automobile, and long-distance telephone service the same or similar prices for a product. In almost
industries. Oligopolists are even popping up on the every case these prices are higher than those deter-
Internet. The Internet bookstores discussed in the mined under competition. The firms also might
cover story”Amazon.com, Barnesandnoble.com, agree to divide the market so that each is guaranteed
and Borders.com”are oligopolists in their industry. to sell a certain amount. Because collusion usually
restrains trade, it is against the law.
Interdependent Behavior
Pricing Behavior
Because oligopolists are so large, whenever one
While an oligopolist can lower the price of its
firm acts the other firms usually follow. For exam-
product at any time, that firm knows that other oli-
ple, if one airline announces discount fares, the
gopolists are likely to follow suit. When one firm
lowers prices it can lead to a price war, or a series of
price cuts that result in unusually low prices.
Competition The cover story describes a typical oligopolistic
price war. Amazon™s two competitors matched its
lower prices immediately, and prices were so low
that none of the firms made a profit at the sale
prices. Oligopolistic price wars are usually short
but intense”and almost always provide welcome
price breaks for consumers.
Raising prices is also risky, unless the firm knows
for certain that its rivals will follow suit. Otherwise,
the firm with higher prices will lose sales to its
competitors. Because of the potential threat to
profits when prices go up or down, oligopolists
generally prefer to compete on a nonprice basis.
Nonprice competition has the advantage of
making it more difficult for rivals to respond
quickly. If an oligopolist finds a new advertising
gimmick or a way to enhance a product, the other
firms are at a disadvantage for a period of time.
After all, it takes longer to develop a better adver-
tising campaign or a new physical attribute for a
product than it does to match a price cut.
Advertising Advertisers often use celebrities,
Oligopoly and Profit Maximization
such as star athletes, to increase the popularity of
their products. What is the purpose of product
The oligopolist, like any other firm, maximizes
differentiation?
its profits when it finds the quantity of output

168 UNIT 2 MICROECONOMICS
ECONOMICS
Figure 7.2
AT A GLANCE
AT A GLANCE

Characteristics of Market Structures
Number of
Influence Product Entry Into
Firms in Advertising Examples
Over Price Differentiation Market
Industry
Perfect: None
Perfect Many None None None Easy Near: Truck
Competition Farming

Fair Fair Gas Stations
Monopolistic Many Limited Easy
Amount Amount Women™s Clothing
Competition

Fair Automobiles
Oligopoly Few Some Some Difficult
Amount Aluminum

Pure Almost Perfect: None
One Extensive None None
Impossible Near: Water
Monopoly



Using Tables The term market structure refers to the nature and degree of competition among firms
operating in the same industry. Individual market structures”perfect competition, monopolistic
competition, oligopoly, and monopoly”are determined by the five characteristics listed in the
columns above. In which market structure does nonprice competition play a major role?




where its marginal cost is equal to its marginal rev- pure monopoly”although the local telephone
enue. Having found this level of production, the company or cable TV operator may come close.
oligopolist will charge the price consistent with this Even the telephone company, however, faces
level of sales. competition from other communication compa-
The product™s final price is likely to be higher nies, from the United States Postal Service, and
than it would be under monopolistic competi- from Internet providers that supply E-mail and
tion, and much higher than it would be under voice-mail services. Local cable providers face
perfect competition. Even when oligopolists do competition from video rental stores, satellite cable
not collude formally, they still tend to act conser- systems, and the Internet. Consequently, when
vatively and seldom protest price hikes by their people talk about monopolies, they usually mean
rivals. near monopolies.
One reason we have so few monopolies is that
Americans traditionally have disliked and tried to
Monopoly outlaw them. Another reason is that new tech-
nologies often introduce products that compete
At the opposite end of the spectrum from
with existing monopolies. The development of
perfect competition is the monopoly. A
the fax machine allowed businesses to send elec-
monopoly is a market structure with only one seller
tronic letters that compete with the United States
of a particular product. This situation”like that of
Postal Service. Later, E-mail became even more
perfect competition”is an extreme case. In fact, the
popular than the fax.
American economy has very few, if any, cases of

CHAPTER 7: MARKET STRUCTURES 169
Types of Monopolies Sometimes a business has a monopoly because
Sometimes the nature of a good or service dictates of its location. A drugstore operating in a town that
that society would be served best by a monopoly. is too small to support two or more such businesses
One such case is a natural monopoly”a market situ- becomes a geographic monopoly, a monopoly
ation where the costs of production are minimized based on the absence of other sellers in a certain
by having a single firm produce the product. geographic area. Similarly, the owner of the only
Natural monopolies can provide services more gas station on a lonely interstate highway exit also
cheaply as monopolies than could several compet- has a type of geographic monopoly.
ing firms. For example, two or more competing A technological monopoly is a monopoly that
telephone companies serving the same area would is based on ownership or control of a manufac-
be inefficient if they each needed their own tele- turing method, process, or other scientific
phone poles and lines. Public utility companies advance. The government may grant a patent”an
fall into this category because it would be wasteful exclusive right to manufacture, use, or sell any
to duplicate the networks of pipes and wires that new and useful invention for a specific period.
distribute water, gas, and electricity throughout a Inventions are covered for 20 years; however, the
city. To avoid these problems, the government product™s designs can be patented for shorter peri-
often gives a public utility company a franchise, the ods, after which they become public property
exclusive right to do business in a certain area available for the benefit of all. Art and literary
without competition. By accepting such fran- works are protected through a copyright, the exclu-
chises, the companies also accept a certain amount sive right of authors or artists to publish, sell, or
of government regulation. reproduce their work for their lifetime plus 50
The justification for the natural monopoly is that years.
a larger firm can often use its personnel, equipment, Still another kind of monopoly is the government
and plant more efficiently. This results in monopoly”a monopoly the government owns
economies of scale, a situation in which the average and operates. Government monopolies are found
cost of production falls as the firm gets larger. When at the national, state, and local levels. In most
this happens, it makes sense for the firm to be as cases they involve products or services that private
large as is necessary to lower its production costs. industry cannot adequately provide.



Competition




Nonprice Competition If advertisers can make you believe their product is better than others, you might
pay more for it. How has nonprice competition affected your buying habits?


170 UNIT 2 MICROECONOMICS
Many towns and cities have monopo- Monopoly
lies that oversee water use. Some states
control alcoholic beverages by requiring
that they be sold only through state
stores. The federal government controls
the processing of weapons-grade uranium
for military and natural security purposes.
Geographic Monopoly
A lone general store
in an isolated area
Monopoly and Profit Maximization enjoys a geographic
monopoly. How does a
Monopolies maximize profits the same
geographic monopoly
way other firms do: they equate marginal differ from a natural
cost with marginal revenue to find the monopoly?
profit-maximizing quantity of output. Even
so, there are differences between the
monopolist and other profit-maximizing
firms”especially the perfect competitor.
First, the monopolist is very much larger
than the perfect competitor. This is because
there is only one firm”the monopolist”
supplying the product, rather than thousands of monopolist. Instead, the monopolist determines
smaller ones. Second, this large size, along with the the price that will equate its marginal revenue with
lack of meaningful competition, allows the monop- its marginal cost, and then produces the quantity of
olist to behave as a price maker”as opposed to the output consistent with that price. In every case, the
perfect competitor who is a price taker. monopolist will charge more for its product”hence
Because there are no competing firms in the the term price maker”and then limit the quantity for
industry, there is no equilibrium price facing the sale in the market.




Checking for Understanding 5. Explain why the actions of one oligopolist
1. Main Idea Describe the four basic market affect others in the same industry.
structures. Explain how they differ from one 6. Identify the types of monopolies.
another.
Applying Economic Concepts
2. Key Terms Define laissez-faire, market struc-
7. Product Differentiation Make a list of as
ture, perfect competition, imperfect competi-
many clothing stores in your community as
tion, monopolistic competition, product
possible. Describe how each store tries to dif-
differentiation, nonprice competition, oligop-
ferentiate itself from the others.
oly, collusion, price-fixing, monopoly, natural
monopoly, economies of scale, geographic
monopoly, technological monopoly, govern-
ment monopoly.
8. Synthesizing Information Provide at least
3. List the five characteristics of perfect two examples of oligopolies in the United
competition. States today.
4. Describe monopolistic competition. Practice and assess key social studies skills with
the Glencoe Skillbuilder Interactive Workbook,
Level 2.



CHAPTER 7: MARKET STRUCTURES 171
“I Love the Challenge”:
Charles Wang
(1944“)

“There are CEOs who brag
about never having touched a PC,”
says Charles Wang, head of
Computer Associates International.
“I say to them, ˜Get your head out
of the sand, kid.™” Wang™s aggres-
sive approach has helped him grow
products. This would spare his development centers for employ-
his company from a four-person
company the risk of developing ees. He brought together 2,000
operation to one that earns more
its own products and enable it members of Computer Associates™
than $5 billion in computer soft-
to get products to market sooner. development staff for “Nerd
ware sales a year. Today, Computer
The strategy paid off. Computer Weekend””a celebration for the
Associates is the largest independ-
Associates purchased a number of people who fueled Computer
ent supplier of software for business
firms throughout the 1980s, and Associates™ growth. Wang also
computing.
increased its sales more than ten- sponsors “Technology Boot Camps”
fold, from $85 million in 1984 to to help chief executives get over
A D I F F I C U LT S TA RT
$1 billion in 1989. their fear and ignorance of com-
Born in Shanghai, China, in The recession of 1990“1991 put puters. In 1994, he wrote a book
1944, Charles Wang and his family a damper on business, but Wang urging business people to start
fled the communist regime in 1952 remained optimistic about the thinking like technology people,
to settle in the United States. Wang future of his company and launched and vice versa.
attended Queens College in New a campaign to purchase even more How has Wang accomplished
York and then opened an American companies. His efforts were amply so much? “I love it when people
subsidiary of Swiss-owned Computer rewarded, and Computer Associates say it can™t be done,” he says. “I
Associates in New York City in soon found itself back on the fast love the challenge.”
1976. Wang began his operations track.
with just one product.
Examining the Profile
PROGRESSIVE
S T R AT E G Y F O R G R O W T H MANAGEMENT
1. Identifying Cause and Effect What
business strategy helped Wang™s fledg-
Wang believed that the best Despite its enormous growth,
ling company become successful?
growth strategy for the fledgling the company still remains focused
company was to purchase existing on its people. Wang supplies on- 2. Evaluating Information How impor-
software firms and market their site fitness facilities and child tant do you think Wang™s “Nerd
Weekend” and similar activities are to
his company™s success?

172 UNIT 2 MICROECONOMICS
Market Failures
Main Idea Objectives
Inadequate competition, inadequate information, After studying this section, you will be able to:
and immobile resources can result in market 1. Discuss the problems caused by inadequate
failures. competition.
2. Understand the importance of having adequate
Reading Strategy information.
3. Describe the nature of resource immobility.
Graphic Organizer As you read the section, think
4. Explain the nature of positive and negative
about why maintaining adequate competition is
externalities.
a worthwhile goal. Use a graphic organizer like
the one below to list effects of competition.
Applying Economic Concepts
Market Failure Have you ever felt that the perfect
If markets are
Effects part-time job is waiting for you”but you just can™t
competitive . . .
seem to find it? If so, you are experiencing market
failure. A market failure usually occurs when we
Key Terms don™t have adequate information about the market.
market failure, externality, negative externality, The result is that productive resources”including
positive externality, public goods you”do not reach their maximum potential.




Cover Stor y
T
he writer of the article cited in the cover
story went on to suggest that airlines should
Mum™s the Word create “child-free zones” by seating children
in the back of the aircraft”and by charging parents
y
We live in increasingl more. This “rare outbreak of humor at The
obile
intolerant times. . . . M
Economist,” according to London™s Daily Telegraph,
t tar-
telephones are the lates
was a hit with readers, resulting in bulging mailbags
line
get: some trains, air
and publicity.
and
lounges, restaurants
ing Woman on cell phone
even golf courses are be The cover story, however, reminds us of another,
eas.
designated “no phone” ar more serious, fact of economic life”that markets
ggest restrictions on
onomist would like to su sometimes fail. How they fail, and how the failures
The Ec
tion: children. . . .
source of noise pollu
another can be remedied, is a concern for economists. We
ones all cause what
driving and mobile ph
Smoking, now want to take a look at how markets fail. Ways to
ties” . . . [the] costs
s call “negative externali
economist
le tend to exceed the deal with these failures will be discussed in the next
activities to other peop
of these section of this chapter.
ho are doing it].
costs to the individuals [w
tes or mobile phones, A competitive free enterprise economy works
children, just like cigaret
For
ty on people who are best when four conditions are met. Adequate
pose a negative externali
clearly im
ffered a 12-hour flight
em. Anybody who has su competition must exist in all markets. Buyers and
near th mediately ahead or a
wling baby in the row im sellers must be reasonably well-informed about
with a ba
ing their seat from
youngster viciously kick conditions and opportunities in these markets.
bored
ickly. . . .
behind, will grasp this qu Resources must be free to move from one indus-
ber 5, 1998 try to another. Finally, prices must reasonably
”The Economist, Decem


CHAPTER 7: MARKET STRUCTURES 173
reflect the costs of production, including the A large corporation does not even have to be a
rewards to entrepreneurs. Accordingly, a market monopoly for its economic power to translate to
failure can occur when any of these four condi- political power. A large corporation, for example,
tions are significantly altered. may demand tax breaks from the state or local gov-
The most common market failures involve cases ernment. If the government refuses, the corpora-
of inadequate competition, inadequate informa- tion may threaten to move elsewhere, causing
tion, resource immobility, external economies, and economic loss to the community. Because the
public goods. These failures occur on both the community does not want to risk the loss, the cor-
demand and supply sides of the market. poration may get its way.


Both Sides of the Market
Inadequate Competition If we consider the supply side of the market, it is
Over time, mergers and acquisitions have clear that perfectly competitive or monopolistically
resulted in larger and fewer firms dominat- competitive markets usually have enough firms to
ing various industries. The decrease in competition ensure competition. When it comes to oligopoly,
has several consequences. however, we know that the temptation to collude is
strong. No competition exists if a monopolist dom-
inates the supply side of the market.
Inefficient Resource Allocation Inadequate competition may occur on the
Inadequate competition tends to curb efficient demand side of the market as well. In most cases,
use of scarce resources”resources that could be such as in the consumer goods and services
put to other, more productive uses if they were markets, many buyers can be found. How many
available. For example, why would a firm with few buyers are there, though, for space shuttles,
or no competitors have the incentive to use hydroelectric dams, super computers, M-1 tanks,
resources carefully? If a firm is free to do as it and high technology fighter jets? While failures
pleases, it likely will spend its profits on bonuses on the demand side of the market do occur, they
and extras like executive jets, lucrative salaries, are more difficult to correct than failures on the
and generous retirement benefits. This is one of supply side.
the reasons that public utilities such as electricity
are regulated by the government”to make sure
Inadequate Information
that they do not use their monopoly status to
waste or abuse resources.
If resources are to be allocated efficiently,
everyone”consumers, businesspeople, and
Higher Prices and Reduced Output government officials”must have adequate informa-
tion about market conditions. A secretary or an
An imperfect competitor such as a monopoly
accountant may receive a competitive wage in the
can use its position to prevent competition and
automobile industry, but are wages for the same
restrict production. This situation brings about arti-
skills higher in the insurance industry, or in the
ficial shortages that cause higher prices than under
banking industry? Even the treasurer of a small
other market structures.
community needs to know if the town™s surplus
funds can earn a higher return if invested in Dallas,
Economic and Political Power New York, Indianapolis, or Seattle. Information
Inadequate competition may enable a business about conditions in many markets is needed before
to influence politics by wielding its economic these questions can be answered.
might. In the past, many firms have used their huge Some information is easy to find, such as want-
capital resources to further the political careers of ads or sale prices found in the local newspaper.
owners and their relatives and friends. Other information is more difficult to obtain. If this

174 UNIT 2 MICROECONOMICS
knowledge is important to buyers, and is difficult to Consider the problems caused when the federal
obtain, then it is an example of a market failure. government closed military bases to save taxpay-
ers™ dollars. Thousands of workers were laid off in
communities that had no immediate means of
employing them. Resource mobility, an ideal in
Resource Immobility the competitive free enterprise economy, is much
One of the more difficult problems in any more difficult to accomplish in the real world.
economy is that of resource immobility. When resources are immobile or refuse to move,
This means that land, capital, labor, and entrepre- markets do not always function efficiently.
neurs do not move to markets where returns are the
highest. Instead they tend to stay put and some-
times remain unemployed.
Externalities
What happens, for example, when a large auto
assembly plant, steel mill, or mine closes, leaving Many activities generate some kind of
hundreds of workers without employment? Certainly externality, or unintended side effect that
some workers can find jobs in other industries, but either benefits or harms a third party not involved
not all can. Some of the newly unemployed may not in the activity that caused it.
be able to sell their homes. Others may not want to A negative externality is the harm, cost, or incon-
move away from friends and relatives to find new venience suffered by a third party because of actions
jobs in other cities. by others. The classic case of a negative externality is



Externalities




Positive and Negative Most economic activities generate externalities. Do you think the nearby airport
expansion was a positive or a negative externality for the people living in this neighborhood? Why?


CHAPTER 7: MARKET STRUCTURES 175
the noise and inconvenience some people suffer Public Goods
when an airport expands.
Another form of market failure shows up in
A positive externality is a benefit received by
the need for public goods. Public goods are
someone who had nothing to do with the activity
products that are collectively consumed by every-
that generated the benefit. For example, people
one, and whose use by one individual does not
living on the other side of town may benefit from
diminish the satisfaction or value available to oth-
the additional jobs generated by the airport
ers. Examples of public goods are uncrowded high-
expansion, or a nearby restaurant may sell more
ways, flood control measures, national defense,
meals, make a greater profit, and hire more work-
and police and fire protection.
ers. Both the owners of the restaurant and the new
The market, however, when left to itself, does not
workers gain from the airport expansion even
supply these items”or only supplies them inade-
though they had nothing to do with the expan-
quately. This is because a market economy pro-
sion in the first place.
duces only those items that can be withheld if
Externalities are classified as market failures
people refuse to pay for them. It would be difficult,
because their costs and benefits are not reflected
for example, to deny one person the benefits of
in the market prices that buyers and sellers pay for
national defense while supplying it to others.
the original product. For example, does the airline
Because it is so difficult to get everyone to pay for
or the air traveler compensate the homeowner for
their fair share of a public good, private markets
the diminished value of the property located near
cannot efficiently produce them and will therefore
the new runway extension? Does the restaurant
produce other things.
owner share the additional good fortune derived
The case of public goods illustrates that while the
from the new business with the airport or the air
market is very successful in satisfying individual wants
traveler? In both cases the answer is no. As a
and needs, it may fail to satisfy them on a collective
result, the prices that travelers pay for air travel
basis. If public goods are to be supplied, the govern-
will not reflect the external costs and benefits that
ment usually has to provide them.
the airport expansion generates.




Checking for Understanding 6. Describe the similarities and differences
1. Main Idea Using your notes from the graphic between positive and negative externalities.
organizer activity on page 173, explain why
Applying Economic Concepts
maintaining adequate competition is a worth-
7. Market Failures Cite at least two examples
while goal.
of situations in your community in which
2. Key Terms Define market failure, externality, resources did not move from one market or
negative externality, positive externality, pub- industry to another because they were either
lic goods. unable or unwilling to move.
3. Define “adequate competition” in your own
words and explain why markets need ade-
quate competition.
8. Understanding Cause and Effect Identify
4. Explain the importance of having adequate one possible positive externality and one
information.
possible negative externality from the clos-
5. Explain why resources are not always mobile ing of a military base.
and willing to move.
Practice and assess key social studies skills with
the Glencoe Skillbuilder Interactive Workbook,
Level 2.



176 UNIT 2 MICROECONOMICS
AUGUST 3, 1998
Newsclip
The showdown over the
Coca-Cola and Pepsi are competing for
Big Apple began . . . when
control of the U.S. beverage market. The
Coke™s largest bottler, Coca-
cola giants are experimenting with new
Cola Enterprises Inc.
marketing strategies in New York City,
(CCE), moved into the New
where the consumer market is considered York market. CCE has since
one of the toughest in the country. added 600 more marketing
people and 60 new trucks to
its delivery fleet. . . .

Cola Wars . . . Each marketing
representative visits up to
120 small stores a week,
With $30 billion in beverage sales between [where they are] pushing
them, Coca-Cola Co. and Pepsico Inc. have long for snazzier displays, bet-
battled each other with multimillion dollar ad ter placement, and more
campaigns and country-by-country marketing promotions. . . .
coups. . . . . . . Pepsi is pushing its own New York cam-
But to make sure all that marketing money paign to the hilt. But rather than send out fresh
translates into bottles sold, both Coke and Pepsi new troops, Pepsi is relying heavily on its bot-
are intensifying their efforts at the local tler™s local distribution force to boost its pres-
level. . . . And nowhere is the fighting more ence in stores, with new racks, coolers, and
heated than in the intensely competitive, giveaways. It is also making a big push to get the
intensely difficult New York market. “Many soft- most from its sponsorships of Lincoln Center,
drink executives think New York is the toughest Radio City Music Hall, and the Bronx Zoo with
market in the country,” says John Sicher, editor ticket giveaways and advertising tie-ins. . . .
of industry newsletter Beverage Digest. “The traf- . . . In this hard-fought battle, Coke and Pepsi
fic is huge, the population is dense, and the are doing everything they can to come out on top.
neighborhoods are complicated.”
”Reprinted from August 3, 1998 issue of Business Week, by special
But it™s also a huge price”and one PepsiCo, permission, copyright © 1998 by The McGraw-Hill Companies, Inc.
headquartered in Purchase, N.Y., would be loath
to lose. Pepsi has always spent big to stay ahead
on its home turf. New York
Examining the Newsclip
is one of only four U.S.
markets where Pepsi- 1. Finding the Main Idea Explain how the
Cola outsells Coca-Cola cola companies are trying to dominate the
Classic. . . . New York consumer markets.
2. Making Predictions What might you
expect to happen to Pepsi and Coke prices
as the companies try to dominate the New
York City market?



CHAPTER 7: MARKET STRUCTURES 177
The Role of Government
Main Idea Objectives
One of the economic functions of government in After studying this section, you will be able to:
a market economy is to maintain competition. 1. Discuss major antitrust legislation in the United
States.
Reading Strategy 2. Understand the need for limited government
Graphic Organizer As you read the section, give three regulation.
reasons government takes part in economic affairs. 3. Explain the value of public disclosure.
Complete an organizer similar to the one below to 4. Discuss the modifications to our free enterprise
help you organize your answer. economy.

Applying Economic Concepts
Public Disclosure Do you have a credit card or a car
Government in
loan? Do you know the size of the monthly payments,
economic affairs
the computation of the interest, and other important
terms of the agreement? Did someone take the time
to explain all these details? Disclosing this information
Key Terms is not merely an act of kindness on the part of the
trust, price discrimination, cease and desist order, business: it is required by a federal public disclosure
public disclosure law to assure that you are a well-informed consumer.




Cover Stor y
T
oday, government has the power to encour-
age competition and to regulate monopolies
Toys “R” Us, Mattel, that exist for the public welfare. In some
cases, government has taken over certain economic
Settle Anti-Trust Suit activities and runs them as government-owned
” Us
Retailing giant Toys “R monopolies. The government also has the power to
agreed
and two top toy makers punish companies”like those in the cover story”by
in toys
to give away $50 million forcing firms to pay penalties when they act in a
as part
and cash to needy kids manner that restrains competition.
nwide
of a settlement of a natio Toys for Tots program
anti-trust suit.
York
Two years ago, New Us . . .
ined to sue Toys “R” Antitrust Legislation
and 43 other states jo nspir-
e Tikes for allegedly co
Mattel, Hasbro and Littl ch as
s to discount retailers su In the late 1800s, the United States passed
ing to limit toy supplie
laws to restrict monopolies, combinations,
ostco.
Sam™s Club and Price-C its
aint [Toys “R” Us] used and trusts”legally formed combinations of corpo-
According to the compl tain a
manufacturers to main
market power over the rations or companies. Since then, a number of key
y give-
stry. . . . The national to
stranglehold on the indu laws have been passed that allow the government
e U.S.
e next three years by th
away will be run over th to either prevent or break up monopolies.
Tots program.
Marine Corps™ Toys for Collectively, this legislation is designed to prevent
y 26, 1999
, Ma
”New York Daily News market failures due to inadequate competition.

178
In 1890 Congress passed the Sherman Antitrust
Act “to protect trade and commerce against
unlawful restraint and monopoly.” The Sherman Consumer Protection
Act, described in Figure 7.3, was the country™s first Accurate and reliable information about prod-
significant law against monopolies. It sought to ucts helps consumers determine which ones
do away with monopolies and restraints that hin- are the best buys. Consumer information is
dered competition. By the early 1900s, a number available on many online sites. Included are
of business organizations had been convicted studies and tests about products and services,
under the Sherman Act. personal finance, health and nutrition, and
other consumer concerns.
The Sherman Act laid down broad foundations
for maintaining competition. The act was not spe-
cific enough, however, to stop many practices that
restrained trade and competition. In 1914 discrimination. Under this act, companies could
Congress passed the Clayton Antitrust Act to give no longer offer special discounts to some customers
the government greater power against monopo- while denying them to others. This law primarily
lies. Among other provisions, this act outlawed affected national organizations and chain stores
price discrimination”the practice of charging that were offering goods and services at lower prices
customers different prices for the same product. than those paid by small independent businesses.
The Federal Trade Commission Act was passed
in the same year to enforce the Clayton Antitrust
Government Regulation
Act. The act set up the Federal Trade Commission
Not all monopolies are bad, and for that rea-
(FTC) and gave it the authority to issue cease and
son not all should not be broken up. In the
desist orders. A cease and desist order is an FTC
case of a natural monopoly, it makes sense to let the
ruling requiring a company to stop an unfair busi-
firm expand to take advantage of lower production
ness practice, such as price-fixing, that reduces or
costs”then regulate its activities so that it cannot
limits competition among firms.
take advantage of the consumer. Ideally, the regula-
In 1936 Congress passed the Robinson-Patman
tor™s goal is to set the same level of price and ser-
Act in an effort to strengthen the Clayton Act,
vice that would exist under competition.
particularly the provisions that dealt with price



ECONOMICS
Figure 7.3
AT A GLANCE
AT A GLANCE

Anti-Monopoly Legislation
Outlawed all contracts Forbade rebates and dis-
“in restraint of trade” counts on the sale of goods
Strengthened the Sherman Established the Federal Trade
to halt the growth of to large buyers unless the
Act by outlawing price Commission to regulate unfair
trusts and monopolies rebate and discount were
discrimination methods of competition in
available to all
interstate commerce

-
ra l
n on
to n
ma t ed e d e n in s a n
la y t r u s t
h er itru s b
F ra io
R o a tm
C ti
St T iss
A n A ct A n A ct P A ct
mm t
90 14 36
Co Ac 4
18 19 19
1
19


Using Charts The federal government enacted four major legislative acts to curb monopolistic
Charts The federal government enacted four legislative acts to curb monopolistic
practices. What is the purpose of the Federal Trade Commission?
purpose the Federal Trade Commission?


CHAPTER 7: MARKET STRUCTURES 179
ECONOMICS
Figure 7.4
AT A GLANCE
AT A GLANCE

Federal Regulatory Agencies
Food and Drug Administration Enforces laws to ensure purity, effectiveness, and truthful
(FDA), 1906 labeling of food, drugs, and cosmetics; inspects production
and shipment of these products

Federal Trade Commission Administers antitrust laws forbidding unfair competition,
(FTC), 1914 price fixing, and other deceptive practices


Federal Communications Commission Licenses and regulates radio and television stations and
(FCC), 1934 regulates interstate telephone, telegraph rates and services


Securities and Exchange Commission Regulates and supervises the sale of listed and unlisted
(SEC), 1934 securities and the brokers, dealers, and bankers who sell
them

National Labor Relations Board Administers federal labor-management relations laws;
(NLRB), 1935 settles labor disputes; prevents unfair labor practices


Federal Aviation Administration Oversees the airline industry
(FAA), 1958


Equal Employment Opportunity Commission Investigates and rules on charges of discrimination by
(EEOC), 1964 employers and labor unions


Environmental Protection Agency Protects and enhances the environment
(EPA), 1970


Occupational Safety and Health Administration Investigates accidents at the workplace; enforces
(OSHA), 1970 regulations to protect employees at work


Consumer Product Safety Commission Develops standards of safety for consumer goods
(CPSC), 1972


Nuclear Regulatory Commission Regulates civilian use of nuclear materials and facilities
(NRC), 1974


Federal Energy Regulatory Commission Supervises transmission of the various forms of energy
(FERC), 1977




Using Charts The government has created a number of federal regulatory agencies to oversee the
economy. Because of government™s involvement in the economy, we have a modified free enterprise
system. With which of the agencies listed in the table are you familiar? Which affect you
directly? Why?


180 UNIT 2 MICROECONOMICS
Examples of Regulation Public Disclosure
Local and state governments regulate many The purpose of public disclosure is to pro-
monopolies, such as cable television companies, vide the market with enough data to prevent
water and electric utilities, and even telephone market failures due to inadequate information. While
companies. A public commission or other govern- there is some cost involved, and while some busi-
ment agency usually approves prices for their ser- nesses might prefer to not disclose anything, the
vices. If a company wants to raise rates, it must benefits to society far outweigh the costs.
argue and prove its case before the commission. One of the more potent weapons available to
Agencies of the national government, such as the government is public disclosure, or the
those listed in Figure 7.4, regulate many busi- requirement that businesses reveal information to
nesses. Privately owned agencies, such as the the public. The degree of disclosure is more exten-
Federal Reserve System, have certain regulatory sive than most people realize, going beyond the
powers, including the power to regulate the content labels that the Food and Drug
money supply, some daily bank operations, and Administration requires on foods and medicines.
even bank mergers. For example, the government requires that all
corporations selling stock to the public must dis-
close financial and operating information on a
Internalizing Externalities regular basis to both its shareholders and to the
The government can also use the tax system to Securities and Exchange Commission (SEC). The
lessen some of the negative externalities in the
economy. Suppose, for example, that firms in a cer-
tain industry are causing pollution, which is flow-
ECONOMICS
ing into a nearby river or even affecting the
atmosphere. Because they are using the environ- Figure 7.5
AT A GLANCE
AT A GLANCE
ment as a giant waste-disposal system, their costs of
production are lower than they should be.
Effects of a Pollution Tax
If government taxes these producers, several
things happen. First, every firm™s cost of produc-
tion goes up, causing each to produce a little less S + tax
at every possible price. This causes the market D $1 per unit
supply curve to shift and the price of the product S
pollution tax
to rise. Consumers of the product react pre- raises cost of
production.
dictably by buying less of the product.
Price




Meanwhile, the government uses the tax proceeds
to clean up the pollution. $15.60
Figure 7.5 shows how this works. First, a $1 tax $15.00
is placed on every unit of output that a firm pro-
S + tax
duces. This shifts the supply curve up by exactly D
$1. The new intersection of supply and demand
S
takes place at $15.60”indicating that the firm
5 6
paid 40¢ of the tax and passed 60¢ on to the
Quantity
consumer.
Economists call this “internalizing an external- Using Graphs A pollution tax shifts the
ity” because it forces the polluting firm and its cus- cost of the negative externality back to the
tomers, rather than innocent third parties, to pay producer and the user of the product. In
for the cost of pollution. Consequently, the gov- the example, how much of the $1 tax
ernment uses policies like this to prevent market does the producer pay?
failures due to negative externalities.

CHAPTER 7: MARKET STRUCTURES 181
Consumer Protection




King Features Syndicate. All rights reserved.


The Role of Government Truth-in-advertising laws are one way the federal government tries to improve
the quality of information in the economy. How do these laws protect consumers?




SEC retains this data electronically in its banks. Most of this information is available to the
Electronic Data Gathering Analysis and Retrieval bank™s competitors as well as to its shareholders,
(EDGAR) system, which can be accessed by any- and it is highly sought after by almost all firms in
one over the Internet. Access is free, and you need the industry.
not be an owner to see the extremely detailed There are also disclosure regulations for busi-
financial and operating information for any firm. nesses that lend to consumers. If you obtain a
Banks are required to file periodic reports to credit card or borrow money to buy a car, the
the Federal Reserve System and other federal lender will take considerable time to explain how
agencies such as the Federal Deposit Insurance the monthly interest is computed, the length of the
Corporation (FDIC) that insures the nation™s loan, the size of the payments, and other important
terms of the agreement. This is not an act of kind-
ness on the lender™s part”federal law requires that
lenders make these disclosures so that consumers
know what they are getting into. Finally, there are
“truth-in-advertising” laws that prevent sellers from
INFOBYTE making false claims about their products.
The SEC The Securities and Exchange Commission
(SEC) is a regulatory agency that is responsible for
Indirect Disclosure
administering federal securities laws. The purpose
of these laws is to protect investors from improper
The government has also worked indirectly
practices in securities markets and to ensure that
to improve the quality of information avail-
they have access to disclosure of all material infor-
able to consumers. One example is the govern-
mation concerning publicly traded securities. The
ment™s support for the Internet, and its attempt to
commission also regulates firms engaged in the
provide low-cost access to all public schools.
purchase or sale of securities, people who provide
Government has also agreed to not collect some
investment advice, and investment companies.
fees, such as taxes on e-commerce sales, in order to
help the Internet grow.

182 UNIT 2 MICROECONOMICS
Modified Free Enterprise
Concern over the costs of imperfect competi-
tion is one reason the government intervenes
in the economy. Historically, the freedom to pursue
Student Web Activity Visit the Economics: Principles and
self-interests led some people and businesses to seek
Practices Web site at epp.glencoe.com and click on
economic gain at the expense of others. Under the
Chapter 7”Student Web Activities for an activity on the
label of competition, some larger firms used their
government™s role in promoting fair business practices.
power to take advantage of smaller ones. In some
markets, monopoly replaced competition.
Businesses have joined the rush to the Web by Because of such conditions, Congress passed laws
posting extensive information about their activi- to prevent “evil monopolies” and to protect the
ties. The Internet provides other information to rights of workers. Its support of labor unions gave
consumers as well. The savvy user can talk to oth- workers more bargaining power. New food and drug
ers in chat rooms, participate in user forums, or laws protected people from false claims and harmful
read product reviews to find out more about a products. Government strictly regulated some indus-
good or service before making a purchase. Other tries, such as public utilities. All these actions led to
services allow consumers to search for the best a modification of free enterprise.
prices. In summary, government takes part in economic
Finally, virtually every government document, affairs for several reasons. One is to promote and to
study, and report is available in some fashion on encourage competition for the benefit of society.
the Internet. This includes the annual budget of Another is to prevent monopolies and reduce the
the U.S. government, and reports by the costs of imperfect competition wherever possible. A
President™s Council of Economic Advisors. Also third is to regulate industries in which a monopoly is
available online are information from the Statistical clearly in the best interest of the public. A fourth is
Abstract of the United States, bulletins by the Bureau to fulfill the need for public goods. As a result,
of Labor Statistics, reports by the Census Bureau, today™s modified private enterprise economy is a
and almost every other publication that you can mixture of different market structures, different kinds
find in the government documents section of a of business organizations, and varying degrees of
major research library. government regulation.




Checking for Understanding Applying Economic Concepts
1. Main Idea Using your notes from the graphic 7. Public Disclosure Visit a bank in your commu-
organizer activity on page 178, explain why the nity and ask for literature describing the com-
government is involved in economic affairs. putation of interest and conditions for with-
drawal on various savings accounts. Why do
2. Key Terms Define trust, price discrimination,
you think the bank is so forthcoming on these
cease and desist order, public disclosure.
issues?
3. Describe four important antitrust laws.
4. Explain why there is a need for limited gov-
ernment regulation within the economy.
8. Synthesizing Information Identify five
5. Describe the value of public disclosure. examples of how government has inter-
vened in your community.
6. Explain why the United States has a modified
free enterprise economy. Practice and assess key social studies skills with
the Glencoe Skillbuilder Interactive Workbook,
Level 2.



CHAPTER 7: MARKET STRUCTURES 183
Finding the Main Idea
Finding the main idea will help you see the “big picture.” Organizing infor-
mation will help you understand and assess the most important concepts.


Learning the Skill Increases in economic growth need not mean increases in
pollution. Pollution is not so much a by-product of growth
To find the main idea, follow these steps:
as it is a “problem of the commons.” Much of the
• Find out the setting of the article. environment”streams, lakes, oceans, and the air”is
treated as “common property,” with no restrictions on its
• As you read the material, ask “What is the purpose
use. The commons have become our dumping grounds; we
of this article?”
have overused and debased them. Environmental
• Skim the material to identify its general subject. pollution is a case of spillover or external costs, and
Look at headings and subheadings. correcting this problem involves regulatory legislation or
specific taxes to remedy misuse of the environment.
• Identify any details that support a larger idea or
There are serious pollution problems. But limiting
issue.
growth is the wrong solution. Growth has allowed
• Identify the central issue. Ask “What part of the economies to reduce pollution, be more sensitive to
selection conveys the main idea?” environmental considerations, set aside wilderness, and
clean up hazardous waste, while still enabling rising
household incomes.
”Alice M. Rivlin, Reviving the American Dream
Washington Brookings Institutions, 1992

1. Who wrote this passage?
2. When was it written?
3. What was the purpose of this article?
4. What is the main idea that the author of the article
is expressing?
5. What additional details in the excerpt support the
main idea?
Chimneys obscured by smoke at coal-fired
6. Do you find the article persuasive? Explain your
power plant
response.
Practicing the Skill
Read the excerpt below, then answer the
questions that follow.
Does [economic] growth threaten the Bring to class a news article that deals with
environment? The connection between growth and competition in the marketplace. Identify the
environment is tenuous, say growth proponents. main idea and explain why it is important.
Practice and assess key social studies skills with the
Glencoe Skillbuilder Interactive Workbook, Level 2.
184 UNIT 2 MICROECONOMICS
Section 1 • Three of the five common
market failures include
Competition and Market inadequate competition,
inadquate information, and
Structures (pages 163“171) resource immobility.
• •
Perfect competition is a market structure with a Externalities, or economic
large numbers of buyers and sellers, identical eco- side effects to third parties,
nomic products, independent action by buyers and are a fourth market failure.
sellers, reasonably well-informed participants, and A negative externality is
freedom for firms to enter or leave the market. a harmful side effect and
a positive externality is a
• Perfect competition is a largely theoretical situation
beneficial side effect.
used as a benchmark to evaluate other market struc-

tures. Market situations lacking one or more of these Externalities are regarded as market failures because
conditions are called imperfect competition. they are not reflected in the market prices of the
activities that caused the side effects.
• Monopolistic competition has all the characteristics

of perfect competition except for identical products. Finally, a market economy often fails to provide
public goods such as national defense and public
• Oligopoly is a market structure dominated by a few
education because it cannot withhold supply from
very large firms, and the actions by one affects the
those who refuse to pay.
welfare of others.
• The monopolist is a single producer
with the most control over sup-
Section 3
ply and price. Various forms
of monopoly include the
The Role of Government (pages 178“183)
natural monopoly, the
geographic monopoly, • The Sherman Antitrust Act of 1890 was enacted to
the technological prohibit trusts, monopolies, and other arrangements
monopoly, and the that restrain competition. The Clayton Antitrust Act
government monopoly. was passed in 1914 to outlaw price discrimination.
The Robinson-Patman Act of 1936 was passed to
• All private firms,
strengthen the price discrimination provisions of the
regardless of market
Clayton Antitrust Act.
structure, maximize prof-
its by producing at the level • Public disclosure is used as a tool to promote com-
of output where marginal cost petition. Any corporation that sells its stock publicly
is equal to marginal revenue. is required to supply periodic financial reports to
both its investors and to the SEC.
• Banks are covered by additional disclosure laws and
Section 2 report to various federal agencies.
• Today, government takes part in economic affairs to
Market Failures (pages 173“176) promote and encourage competition. As a result, the
• Market failures occur when sizable deviations from modern economy is a mixture of different market
one or more of the conditions required for perfect structures, different forms of business organizations,
competition take place. and some degree of government regulation.


CHAPTER 7: MARKET STRUCTURES 185
7. Explain what is meant by resource immobility.
8. Explain what is meant by positive and negative
externalities.
9. Account for the reluctance of the private sector to
Self-Check Quiz Visit the Economics: Principles
produce public goods.
and Practices Web site at epp.glencoe.com and
click on Chapter 7”Self-Check Quizzes to prepare
for the chapter test.
Section 3 (pages 178“183)
10. Identify four major antitrust laws.
Identifying Key Terms 11. List 10 major federal government regulatory agencies.
12. Explain how public disclosure is used as a tool to
Use all the terms below in four paragraphs, with each para-
prevent market failures.
graph describing one of the major types of market structures.
13. Describe a modified free enterprise economy.
collusion
geographic monopoly
imperfect competition
Thinking Critically
monopolistic competition
natural monopoly 1. Drawing Inferences Do you think there would
oligopoly be any advantages to making monopolies or near
product differentiation monopolies break up into smaller, competing
technological monopoly firms? If so, what are they? If not, why would
price-fixing there not be? Use a chart like the one below to
monopoly help you organize the answers to these questions.
nonprice competition
perfect competition Monopolies should
Reasons
be broken up

Reviewing the Facts Monopolies should
Reasons
Section 1 (pages 163“171) not be broken up

1. Describe the five characteristics of perfect
2. Understanding Cause and Effect How are natu-
competition.
ral monopolies prevented from practicing monop-
2. Explain the main characteristics of the monopolistic olistic practices?
competitor.
3. Making Generalizations To what extent do you
3. Contrast the oligopolist and the perfect competitor. think government should be involved in the free
4. Describe the four types of monopolies. enterprise economy? Defend your answer.
4. Finding the Main Idea What problems do the
Section 2 (pages 173“176) Federal Trade Commission, the Securities and
Exchange Commission, and the Consumer
5. Explain what happens when markets do not have
Product Safety Commission address?
enough competition.
5. Summarizing Information Why do private pro-
6. Provide two examples of inadequate information in
ducers fail to provide public goods?
a market.


186 UNIT 2 MICROECONOMICS
Applying Economic Concepts analyzing the costs and benefits of the steps as they
are made. How is this way of thinking similar to the
1. Market Failures Explain how your newspaper, profit maximization logic illustrated in Figure 7.1
with its help-wanted ads and weekly sale prices, on page 165?
helps prevent market failures.
2. Market Structures Identify a fast-food product
Technology Skill
that you consume regularly. Count the number
Developing Multimedia Presentations Choose a
of firms in your community that supply a similar
product offered by several producers that is adver-
product, and then identify the market structure
tised in newspapers or magazines. For one week,
for that product in your community.
clip and save at least three different advertisements
3. Free Enterprise How does the federal government
about your product. Keep a journal in which you
attempt to preserve competition among business
evaluate each advertisement and summarize why
enterprises?
you would or would not buy a particular brand.
Use your evaluations and a video camera to develop
a commercial advertising a product of your choice.
Math Practice Have other students evaluate your commercial for
The table below shows the price, market demand, mar- its effectiveness.
ket supply, and the surplus and shortage for a firm pro-
viding a product under perfect competition. Study the
information in the table, then answer the questions.

Market Market Surplus/
Price Demand Supply Shortage Finding the Main Idea Read the excerpt
below, then answer the questions that
10 600 1550 950
follow.
9 ----- 1500 780
8 850 1450 -----
Monopolistic competition occurs when
7 990 1400 -----
there are many producers of products
6 ----- 1350 210

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