Page 625 - Krugmans Economics for AP Text Book_Neat

section 11

Module 58: Introduction to Perfect Competition
Module 59: Graphing Perfect Competition Market Structures:
Module 60: Long-Run Outcomes in Perfect
Competition
Module 61: Introduction to Monopoly Perfect Competition
Module 62: Monopoly and Public Policy
Module 63: Price Discrimination
Economics by Example: and Monopoly
“Is Adam Smith Rolling Over in His Grave?”

Section 10 explained how factors including the number would enter the organic food fray, increasing supply and
of firms in the industry, the type of product sold, and the driving down price. With a large and growing number of
existence of barriers to entry determine the market power buyers and sellers, undifferentiated products, and few bar-
of firms. We learned about the four basic market structures— riers to entry, the organic food market increasingly resem-
perfect competition, monopoly, oligopoly, and monopo- bles a perfectly competitive market.
listic competition. We can think about these structures In contrast, the market for diamonds is dominated by
as falling along a spectrum from perfect competition at one supplier, De Beers. For generations, diamonds have
one end to monopoly at the other, with monopolistic been valued not just for their attractive appearance, but
competition and oligopoly lying in between. To shed also for their rarity. But geologists will tell you that dia-
more light on the market structure spectrum, consider monds aren’t all that rare. In fact, they are fairly common
two very different markets introduced in previous sec- and only seem rare compared to other gem-quality stones.
tions: the market for organic tomatoes and the market This is because De Beers makes them rare: the company
for diamonds. controls most of the world’s diamond mines and limits the
In the United States, a growing interest in healthy living quantity supplied to the market. This makes De Beers re-
has steadily increased the demand for products such as or- semble a monopolist, the sole (or almost sole) producer of a
ganically grown fruits and vegetables. Over the past good. Because De Beers controls so much of the world’s di-
decade, the markets for these products have been healthy amond supply, other firms have considerable difficulty try-
as well, with an average growth rate of 20% per year. It costs ing to enter the diamond market and increase the quantity
a bit more to grow crops of the gems available.
without chemical fertilizers In this section we will
and pesticides, but con- study how markets like
sumers are willing to pay those for organic tomatoes
higher prices for the benefits and diamonds differ, and
of fruits and vegetables how these markets respond
grown the natural way. The to market conditions. We
farmers in each area who pio- will see how firms posi-
neered organic farming tech- tioned at opposite ends of
niques had little competition the spectrum of market
and many prospered thanks power—from perfect com-
to these higher prices. petition to monopoly—
But with profits as a lure make key decisions about
for expanded production, the output and prices. Then, in
high prices were unlikely to Section 12, we will com-
persist. Over time, farmers al- Bjorn Andren/Nordic Photos/Getty Images plete our exploration of
ready producing organically market structure with a
would increase their capacity, closer look at oligopoly and
and conventional farmers monopolistic competition.
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