What’s in This Chapter?

In this chapter we discuss four types of industries, each with varying degrees of competition. A purely competitive industry is most competitive. A monopolistically competitive industry is very competitive, but each firm has a small degree of monopoly power. An oligopoly industry is an industry in which only a small number of firms dominate the market. A monopoly is an industry with only one seller.

We also learn about the characteristics and profit maximizing behaviors of purely competitive industries. In the next unit (7), we look at characteristics and behaviors of monopolies. In Unit 8 we study monopolistically competitive and oligopoly industries. Economists use these industry models to explain behaviors of industries with varying degrees of competition and to draw important conclusions for policy-making purposes.

We discover that competition is essential in a well-functioning economy. It prevents prices from becoming excessive. In a competitive market, businesses will fail if they charge prices that are much higher than the competition. The Internet, despite some of its drawbacks, has helped increase competition in many industries. Buyers can more easily shop for millions of products, and immediately know most of their qualities and prices. Many businesses use the Internet at a relatively low cost. This increases competition and promotes efficiency and lower prices.