Page 612 - Krugmans Economics for AP Text Book_Neat

fyi

What’s a Standardized Product?
A perfectly competitive industry must produce a region of France, where the product origi- Similarly, Korean producers of kimchi, the
standardized product. But is it enough for the nated, and similar products from Spain spicy fermented cabbage that is the Korean na-
products of different firms actually to be the or California. But the French government tional side dish, are doing their best to convince
same? No: people must also think that they are has sought and obtained legal protection consumers that the same product packaged by
the same. And producers often go to great for the winemakers of Champagne, ensuring Japanese firms is just not the real thing. The
lengths to convince consumers that they have a that around the world only bubbly wine purpose is, of course, to ensure higher prices
distinctive, or differentiated, product, even when from that region can be called champagne. for Korean kimchi.
they don’t. If it’s from someplace else, all the seller So is an industry perfectly competitive if it
Consider, for example, champagne—not can do is say that it was produced using sells products that are indistinguishable except
the super-expensive premium champagnes, the méthode Champenoise. This creates in name but that consumers, for whatever rea-
but the more ordinary stuff. Most people a differentiation in the minds of consumers son, don’t think are standardized? No. When it
cannot tell the difference between cham- and lets the champagne producers of comes to defining the nature of competition, the
pagne actually produced in the Champagne Champagne charge higher prices. consumer is always right.

Free Entry and Exit
An industry has free entry and exit
when new firms can easily enter into the All perfectly competitive industries have many firms with small market shares, pro-
industry and existing firms can easily leave ducing a standardized product. Most perfectly competitive industries are also char-
the industry. acterized by one more feature: it is easy for new firms to enter the industry or for
firms that are currently in the industry to leave. That is, no obstacles in the form of
government regulations or limited access to key resources prevent new firms from
entering the market. And no additional costs are associated with shutting down a
company and leaving the industry. Economists refer to the arrival of new firms into
an industry as entry; they refer to the departure of firms from an industry as exit.
When there are no obstacles to entry into or exit from an industry, we say that the in-
dustry has free entry and exit.
Free entry and exit is not strictly necessary for perfect competition. However, it en-
sures that the number of firms in an industry can adjust to changing market condi-
tions. And, in particular, it ensures that firms in an industry cannot act to keep other
firms out.
To sum up, then, perfect competition depends on two necessary conditions. First,
the industry must contain many firms, each having a small market share. Second, the
industry must produce a standardized product. In addition, perfectly competitive in-
dustries are normally characterized by free entry and exit.

Monopoly

Paul Katz/Digital Vision/Getty Images ing companies, all competing with each other. During the 1880s Rhodes bought
The De Beers monopoly of South Africa was created in the 1880s by Cecil
Rhodes, a British businessman. By 1880, mines in South Africa already
dominated the world’s supply of diamonds. There were, however, many min-

the great majority of those mines and consolidated them into a single
company, De Beers. By 1889, De Beers controlled almost all of the world’s dia-
mond production.
De Beers, in other words, became a monopolist. But what does it mean to be a
monopolist? And what do monopolists do?

570 section 10 Behind the Supply Curve: Profit, Production, and Costs