Chapter 7 - Market Structure

In a market with perfect competition, prices are determined by supply and demand. This means that the price of a product or service is influenced by the amount of supply available and the level of demand from consumers. When supply is high and demand is low, prices tend to decrease. Conversely, when supply is low and demand is high, prices tend to increase. In a perfect competition market, there is no government regulation or agreement among producers that directly influences prices. Prices are solely determined by the forces of supply and demand.

In a competitive market structure, when a major airline lowers its prices, other airlines will likely lower their prices as well. This is because they want to remain competitive and attract customers who may be drawn to the lower prices offered by the major airline. By lowering their prices, the other airlines aim to retain their market share and prevent customers from switching to the major airline. Therefore, the most likely response of other airlines in this market structure would be to lower their prices.

In a monopoly market structure, there is only one seller or producer of a particular product or service. This gives the producer a significant amount of market power as they have complete control over the supply and price of their product. They can set prices at a level that maximizes their profits without worrying about competition from other sellers. This lack of competition allows monopolies to have the most market power compared to other market structures.

Under perfect competition, no seller sells a product above the market price. This is because in a perfectly competitive market, there are many buyers and sellers, and no individual seller has the power to influence or set the price. The price is determined solely by the market forces of supply and demand. If a seller were to sell a product above the market price, buyers would simply choose to purchase from another seller offering the same product at a lower price, resulting in the seller losing customers and market share. Therefore, in a perfectly competitive market, sellers have to accept the prevailing market price for their product.

Positive and negative externalities are mostly called market failures because their costs and benefits are not reflected in the market prices paid by buyers and sellers. This means that the true social costs or benefits of these externalities are not taken into account in the pricing mechanism of the market. As a result, the market fails to efficiently allocate resources and achieve an optimal outcome.

The market structure for babysitting in that neighborhood is monopolistic competition. This is because there are many teenagers working as babysitters, indicating a large number of sellers. Additionally, each teenager has a different personality and degree of experience, which leads to product differentiation. This means that each babysitter offers a slightly different service, creating some level of market power for the individual sellers. However, there is still freedom of entry and exit in the market, making it different from a monopoly or oligopoly. Perfect competition is also not applicable as there is product differentiation.

Market structures with only a few producers, each offering a product similar or identical to the others, are typically referred to as oligopoly markets. In oligopoly markets, there are a small number of firms that dominate the industry and have significant market power. These firms often compete with each other through non-price competition, such as advertising and product differentiation, as well as through pricing strategies. The presence of only a few producers and the similarity of their products make oligopoly markets distinct from monopoly markets, where there is only one producer, and from monopolistically competitive markets, where there are many producers offering differentiated products.

The market system relies on individual users paying for the goods and services they consume. However, when it comes to public goods like street lighting, it is difficult to charge individual users because the benefits are shared by the entire community. Since there is no easy way to determine and collect payments from individual users, the market system fails to provide these public goods efficiently.

The best example of an externality is when you enjoy looking at your neighbor's garden. An externality occurs when the actions of one person or entity affect the well-being of others, without any compensation or payment. In this case, your enjoyment of your neighbor's garden is not a result of any direct transaction or interaction between you and your neighbor, but rather a positive externality that you receive from their actions.

This answer is correct because monopolistic competition refers to a market structure where there are many firms selling differentiated products. In this case, all restaurants serve people, which implies that they are all part of the same market. The statement "one restaurant serves the most people" suggests that there is some level of market power or dominance by one particular restaurant, which is a characteristic of monopolistic competition.