2.2 - Government and the Economy

Market Structure

  • market structure - how a market is organized based on the number of business competing for sales in an industry

    Monopoly - a market structure with one business that has complete control of a market’s entire supply of goods or services

  • oligopoly - a market structure with a small number of businesses selling the same of similar products

  • monopolistic competition - a large number of businesses selling similar (not the same) products and at different prices

  • perfect competition - characterized by a large number of businesses selling the same product at the same prices

  • competition in monopolistic competition is price or non-price

    • price competition - lower price in the main reason for customers to buy one business over another

    • non-price competition - a competitive advantage based on factors other than price

Role of Government in the Economy

  • The foundation of free enterprise is freedom of choice

  • US constitution gives congress power to regulate commerce

    • commerce - the activities involved in buying and selling goods on a large scale

  • roles of the government in the economy:

    • manages economy

    • provides public goods and services

    • provides legal framework

    • promotes competition

    • corrects for extranatities

Manage the economy

  • fiscal policy - the tax and spending decisions made by a the president and congress

    • can boost economy when weak

  • monetary policy - regulates the supply of money and interest rates by a central bank in an economy

  • federal reserve system - the central bank of the US

  • money supply - the total money circulating at any one time in a country

provide public goods and services, available to anyone in the economy

  • public education

  • construction and maintenance of roads

  • police and fire protection

  • postal services

  • public parks

Provide a Legal Framework

  • necessary for a legal government economy to function

  • all levels of government make and enforce laws

  • criminal laws

  • civil laws

Promoting Competition

  • antitrust laws - promote fair trade and competition among businesses

  • laws to prevent monopolies

  • price fixing - when two or more businesses in an industry agree to sell the same good or services at the same price

  • collusion - when two or more businesses work together to remove their competition, set prices, and control distribution

Correcting for Externalities

  • externalities are not connected to economic activity, but affect people

    • externalities are caused by one party, but affect another party