Chapter 7: The Power to Price (Monopoly and Competition)
Monopoly: Only sellers of product/service no close substitutes available
Market Power: businesses ability to set prices
Price Maker: Pure monopoly with maximum power to set prices
-Businesses can set any price they chose, but they can’t force consumers to buy. Even
monopoly price makers must live by the law of demand.
Price Taker: Business with zero power to set price different from market price.
Extreme Competition: Many sellers producing identical products/ services.
Market Structure: Characteristics that affect competition and pricing power—
availability of substitutes, number of competitors, barriers to entry of new
-Markets can be defined narrowly on broadly. Move broadly = More substitutes and
competition. More narrowly = fewer substitutes and competitors.
Product Differentiation: Attempt to distinguish product from competitors
Fewer competitors = More price power
More competitors = Less price power
Barriers to entry: Legal or economic barriers preventing new competitors from
Patents and Copyrights: Exclusive property rights to sell or license creations,
protecting against competition.
-Patents and copyrights give businesses shot-term monopoly power (incentive for
innovation) but eventually expire (balance consumers desire for reasonably priced
Economies of Scale: Average cost of producing falls as quantity (scale) of
Average Total Costs = (Fixed Costs + Variable Costs)