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Competition Within Free Markets: Types & Summary

Competition Within Free Markets: Types & Summary
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  • 0:06 Consumers and the Market
  • 0:45 Perfectly Competitive Markets
  • 1:30 Monopoly
  • 2:16 Monopolistic Competition
  • 3:11 Oligopoly
  • 3:43 Lesson Summary
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Lesson Transcript
Instructor: Shawn Grimsley
We live in a free market economy, but that doesn't mean there is always free competition. In this lesson, you'll learn about perfectly competitive markets, monopolies, monopolistic markets and oligopolies.

Consumers and the Market

Meet Cathy the consumer. Like every red-blooded American consumer, she loves to shop and spend. Cathy makes her purchases in a market. A market is a place buyers and sellers meet to make exchanges, such as money for a cell phone. The economic system you're probably most familiar with is a free market, a market where the government doesn't intervene in day-to-day economic activities, such as setting prices or telling businesses what they can produce.

Cathy is always on the lookout for good deals. Some markets are better than others for Cathy. There are four general types of market structures: a perfectly competitive market, a monopoly, monopolistic competition and an oligopoly.

Perfectly Competitive Markets

Cathy will usually find the best bargains in a perfectly competitive market. This type of market is characterized by a large number of small businesses that sell the same types of products with the same characteristics. It's easy for businesses to enter the market and leave it. Everyone has all the information and technology needed to make smart and informed decisions in the marketplace.

In a perfectly competitive market, businesses have to compete on price because all the products are basically the same. Thus, Cathy can get the best price available because businesses will compete with each other by lowering prices. Of course, in the real world, a perfectly competitive market does not exist. The closest example is a commodity, like oranges at your grocery store. A navel orange is a navel orange.

Monopoly

The worst possible market for Cathy is a monopoly. In a monopoly market, Cathy can only buy the product she wants from one seller. No other business offers the same thing. It's very hard, if not impossible, for new businesses to enter the market. For example, a drug company with a patent on a new drug will have a monopoly on that medicine until the patent expires.

Since a business in a monopoly has no competition, it has a great degree of power in the market. It can determine how much of a good or service to supply the market. And, it also has a great deal of power of the pricing of its goods and services. The business can charge a price for its goods and services as high as buyers like Cathy are willing to pay. Of course, if the price is too high, Cathy and other potential purchasers will not buy.

Monopolistic Competition

In a monopolistic competition, you have a large number of small businesses just like in a perfectly competitive market. However, in a monopolistic market, businesses don't sell identical products like you find in a perfectly competitive market. Instead, they sell similar products. This means that businesses can compete not only on price but also on different characteristics of their products. For example, there is a wide variety of clothing from which Cathy can choose.

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