MONOPOLIES, OLIGOPOLIES,

& COMPETITION

PRIVATE GOODS
Private goods can only be consumed by
one person
Private goods are subject to the exclusion
principle a person is excluded from
using the good unless they pay for it

PUBLIC GOODS
Public goods goods that
can be consumed by one
person without preventing
another from consuming
Subject to the nonexclusion
principle no one can be
excluded from consumption
whether they pay or not

DEALING WITH EXTERNALITIES

Govt plays a role in handling externalities
the unintended side effect of an action
that affects someone not involved in the
action (these can be positive or negative)

MAINTAINING COMPETITION

Govt uses antitrust laws to prevent monopolies (only one

provider of a good or service) and preserve and promote
competition
In 1890, Congress passed the Sherman Antitrust Act which
outlawed mergers and monopolies that limit trade btwn states
What does perfect competition look like?

COMPETITION VS.
MONOPOLY
Perfect Competition
Number of Firms: Many
Variety of Goods: None
Control over Prices:
None
Barriers to Entry: None
Examples: Wheat,
shares of stock
No
Control

ENTRY

MAINTAINING COMPETITION
Why? Competition ensures better quality
Govt oversees mergers a combination
of two or more companies to form a single
business
Blocking mergers is an effective way to
prevent monopolies from forming

COMPETITION VS.
MONOPOLY
Monopoly
(Natural Monopoly)
Number of Firms: One
Variety of Goods: None
Control over Prices:
Complete
Barriers to Entry:
Complete
Examples: Public
water

Complete
Control

ENTRY

REGULATING MARKET ACTIVITIES

Sometimes it makes sense to have a monopoly
natural monopolies a market situation in
which the costs of production are minimized by
having a single firm produce a product
Govt issues patents giving companies
exclusive rights to sell products
Franchising allows local authorities (like
WCPSS) to give a single firm the right to sell its
goods (what soft drinks are sold at sporting
events at PCHS?)
Industrial monopolies In rare cases govt
allows companies in an industry to regulate the
number of firms in a market (ex: MLB, NFL,
NBA)

Cleveland

Monopoly
Decisions in the NFL
Los Angeles
The second-largest city in the
U.S. lost teams to Oakland and
St. Louis in 1995. The NFLs
30 team owners voted to give
L.A. a new team in March 1999,
but withdrew the offer when
L.A. could not meet their
demands for a new stadium.

The owner of the Cleveland

Browns took his team to
Baltimore in 1995. After
Cleveland built a new stadium
with help from NFL loans, the
NFL approved a new team for
Cleveland in 1999.

Baltimore
Houston
The fourth-largest city in the U.S.
lost the oilers to Tennessee in 1996.
An underdog, Houston beat out L.A.
for a new team in October 1999
when it promised to build a $310
million stadium and pay the NFL a
$700 million fee.

In 1984, Baltimore lost the Colts to

Indianapolis. With no help from
the NFL in sight, the city lured the
Browns from Cleveland via a 30year, zero-rent lease on a new
stadium. Renamed the Ravens,
the team won the Super Bowl for
Baltimore in 2000 by a score of
34-7.

IMPERFECT MONOPOLIES
Oligopoly is the term economists use for an imperfect
monopoly
Instead of one dominant firm, there are a few profitable
firms (usually controlling 70%-80% of the output)
Barriers to the market are high patents, brand names,
need for investment
What keeps oligopolies from banding together to form a
monopoly?
This is called collusion and often results in price fixing
this is illegal in the U.S. and most companies wont take
the chance

OLIGOPOLY
Oligopoly
Number of Firms: A few
Variety of Goods:
Some
Control over Prices:
Some
Barriers to Entry: High
Examples: Soda, cars,
movie studios
Some
Control

ENTRY

THE BUSINESS CYCLE

THE BUSINESS CYCLE - TERMS

Real GDP an economys production
after the distortions of price have been
removed
Expansion a period when RGDP goes
up
Peak the highest point in an expansion
Recession a period when RGDP goes
down for six straight months

THE BUSINESS CYCLE - TERMS

Trough the lowest point during recession
Depression when recession lasts for
more than six straight months

THE BUSINESS CYCLE

OTHER MEASURES OF THE

ECONOMY
Unemployment rate the %-age of the
civilian labor force (all civilians 16 years
old or older who are working or looking for
work) who are not working but looking for
work
Fiscal Policy changes in govt spending
and tax policy

OTHER MEASURES OF THE

ECONOMY
Inflation a sustained increase in the
general level of prices
To track inflation the govt uses the
consumer price index (CPI) a measure
of the price level of 400 various products
Dividends a share of the corporations
profits distributed to shareholders
Capital gain occurs when stock can be
sold for more than it originally cost to buy