Chapter 7   competition and the market
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Chapter 7 competition and the market

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Chapter 7   competition and the market Chapter 7 competition and the market Presentation Transcript

  • Competition and the Market Chapter 7
  • The function of Price Price brings quantity supplied in line with quantity demanded. As a good becomes relatively more scarce, price will go up. How does this impact firms and consumers?
  • Markets can be characterized by how prices for goods and services are determined
  • Major Market Structures Perfect competition Monopolistic competition Oligopoly Monopoly
  • Forms of Market Competition Perfect Competition Monopoly Monopolistic Competition Oligopoly
  • The Competitive Model The process of competition involves a rivalry among firms and is prevalent throughout our economy.
  • The Competitive Model The state of competition is the end result of the competitive process under certain conditions.
  • Factors Affecting the Form of Market Competition an Industry Expresses
  • Factors The number and size distribution of buyers and sellers The degree of product differentiation
  • Factors The extent of barriers to entry Amount of information available
  • Factor #1: The number and size distribution of buyers and sellers
  • Number and Size Distribution E.g. farmers and consumers 2 million farms in US 1.2 million are small with < $20,000 annual income
  • Number and Size Distribution Most farm’s output is so small, any one’s output, compared to total output, is imperceptible. What one farmer does has no influence on what any other farmer does.
  • Number and Size Distribution The same can be said for consumers. Marketplace has many consumers and the vast majority consume small amounts.
  • Factor #2: Product Differentiation
  • Product Differentiation A competitive market is characterized by undifferentiated or homogeneous products.
  • Product Differentiation Homogeneous or undifferentiated products cannot be distinguished from one another. E.g. No. 2 yellow corn
  • Product Differentiation If you feed livestock and have two different corn sellers you can buy from, how do you determine which to buy from?
  • Product Differentiation Grain elevator A No. 2 yellow corn $2.10/bu Grain elevator B No. 2 yellow corn $2.11/bu
  • Product Differentiation What determines decision? Price! Identical product 5000 bu x $.01 less/bu = $50 savings by using elevator A
  • Factor #3: Barriers to Entry
  • Barriers to Entry Barriers are things that prevent other firms from entering the market.
  • Barriers to Entry Economics of scale Absolute unit cost advantages Capital access cost
  • Barriers to Entry Government policy Patents Commodity programs Import controls
  • Factor #4: Perfect Knowledge and Information
  • Knowledge and Info In a perfectly competitive market, firms would have same access to new knowledge and information about market prices, quantities, and quality.
  • Profit Maximizing Entrepreneurial Firms For perfect competition to exist, firms must have a singular goal of profit maximization.
  • The Profit Motive and the Results of Competition The competitive firm’s demand curve
  • $$ QuantityQuantity The competitive firm’sThe competitive firm’s demand curvedemand curve
  • $$ MR = D = PMR = D = P QuantityQuantity PPmm The competitive firm’sThe competitive firm’s demand curvedemand curve
  • The optimal level of output for a competitive firm is determined where Marginal Revenue (MR) is equal to Marginal Cost (MC).
  • $$ QuantityQuantity Optimal Output Level
  • $$ MR = DMR = D QuantityQuantity PP** Optimal Output Level
  • $$ MCMC MR = DMR = D QuantityQuantity PP** Optimal Output Level
  • $$ MCMC MR = DMR = D QuantityQuantityQQ** PP** Optimal Output Level
  • Average Total Cost (ATC) can be added to the graph to demonstrate the firm’s profit potential.
  • Average Total Cost The per unit cost of producing a specific good. The difference between ATC and product’s price equals the profit per unit of product.
  • $$ QuantityQuantity Average Total Cost
  • ATCATC $$ QuantityQuantity Average Total Cost
  • Average Total Cost Price - ATC = Profit per unit of output Note: Price > ATC indicates a profit
  • $$ QuantityQuantity
  • $$ MR = DMR = D = P= P QuantityQuantity PP**
  • $$ MCMC MR = DMR = D = P= P QuantityQuantityQ*Q* PP**
  • $$ MCMC MR = DMR = D = P= P QuantityQuantity ATCATC PP**
  • $$ MCMC MR = DMR = D = P= P QuantityQuantity ATCATC QQ** PP**
  • ProfitProfit $$ MCMC MR = DMR = D = P= P QuantityQuantity ATCATC QQ** PP**
  • Profit Price - ATC = Profit per unit of output Note: Price < ATC indicates a loss
  • Profit  It is important to note that profit in a perfectly competitive market will lead to firms wanting to enter that market  If enough firms enter, then the market supply curve will shift to the right.
  • $ or Price$ or Price SS DD QuantityQuantity PPee QQee
  • $ or Price$ or Price SS DD QuantityQuantity PPee QQee SS
  • Profit With the increase in Supply, price will be driven down. With the lower price, profits will be driven out.
  • $$ QuantityQuantity
  • $$ MR = DMR = D = P= P QuantityQuantity PP**
  • $$ MCMC MR = DMR = D = P= P QuantityQuantity PP**
  • $$ MCMC MR = DMR = D = P= P QuantityQuantity ATCATC PP**
  • $$ MCMC MR = DMR = D = P= P QuantityQuantity ATCATC QQ** PP**
  • $$ MCMC MR = DMR = D = P= P QuantityQuantity ATCATC QQ** PP** LossLoss
  • $ or Price$ or Price SS DD QuantityQuantity PPee QQee
  • $ or Price$ or Price SS DD QuantityQuantity PPee QQee SS
  • Profit With the decrease in Supply, price will be driven up. With the higher price, the losses will be driven out.
  • Market Price and Quantity
  • What are the factors that generate the market price that firms use to make their production decisions?
  • The interaction of the Market Supply and Market Demand curves will determine the price consumers will pay and producers will receive.
  • Market Supply and Demand Relationship for a Competitive Market
  • $ or Price$ or Price QuantityQuantity
  • $ or Price$ or Price DD QuantityQuantity
  • $ or Price$ or Price SS DD QuantityQuantity
  • $ or Price$ or Price SS DD QuantityQuantity PPee QQ
  • Specific Results of Competition Price takers Optimal output No product differentiation
  • Specific Results of Competition Market equilibrium Technological advancements Efficiency
  • Changes in Supply or Demand
  • An Increase in Supply
  • An Increase in Supply  Note the supply curve shifts to the right.  This lowers price and increases quantity supplied.
  • An Increase in Supply  A decrease in supply would be represented by a shift of the supply curve to the left.
  • $ or Price$ or Price QuantityQuantity
  • $ or Price$ or Price DD QuantityQuantity
  • $ or Price$ or Price SS DD QuantityQuantity
  • $ or Price$ or Price SS DD QuantityQuantity PP QQ
  • $ or Price$ or Price SS DD QuantityQuantity PP QQ SS11
  • $ or Price$ or Price SS DD QuantityQuantity PP QQ SS11 PP11 QQ11
  • Supply Shifters Input Costs Prices of Related Goods Technology Weather Number of Sellers Taxes Expectations
  • An Increase in Demand
  • $ or Price$ or Price QuantityQuantity
  • $ or Price$ or Price DD QuantityQuantity
  • $ or Price$ or Price SS DD QuantityQuantity
  • $ or Price$ or Price SS DD QuantityQuantity PP QQ
  • $ or Price$ or Price SS DD QuantityQuantity PP QQ DD11
  • $ or Price$ or Price SS DD QuantityQuantity PP QQ DD11 PP11 QQ11
  • An Increase in Demand Note Demand Curve shifts right Increases price Increases quantity demanded
  • A Decrease in Demand Demand Curve would shift left Decreases price Decreases quantity demanded
  • Demand Shifters Income Population Tastes and Preferences Prices of Related Goods Expectations
  • Agriculture’s Competitive Side 2.1 mil farms Homogeneous products Freedom of entry and exit Information is available
  • Agriculture’s Departure from Competition Soviet grain deal of 1973 Marketing cooperatives High land prices Technology availability
  • Models of Imperfect Competition
  • Imperfect competition exists whenever a firm has some control over the price it charges for its product.
  • Forms of Competition PerfectPerfect CompetitionCompetition MonopolyMonopoly MonopolisticMonopolistic CompetitionCompetition OligopolyOligopoly Imperfect CompetitionImperfect Competition
  • Monopolistic Competition Many sellers in market Differentiated products Ease of entry or exit Information is readily available
  • Monopolistic Competition Non-price competition usually occurs
  • $$ QuantityQuantity1 5 101 5 10 Monopolistic Competitor Demand Curve
  • $$ QuantityQuantity DD 1 5 101 5 10 Monopolistic Competitor Demand Curve
  • Monopolistically Competitive Firm’s Price, Quantity, and Profit Short Run
  • $$ QuantityQuantity 1 5 101 5 10 2222 1818 1414 1010 66 22 Monopolistically Competitive SR
  • $$ QuantityQuantity DD 1 5 101 5 10 2222 1818 1414 1010 66 22 Monopolistically Competitive SR
  • $$ QuantityQuantity DD 1 5 101 5 10 2222 1818 1414 1010 66 22 MRMR Monopolistically Competitive SR
  • $$ QuantityQuantity DD 1 5 101 5 10 2222 1818 1414 1010 66 22 MRMR MCMC Monopolistically Competitive SR
  • $$ QuantityQuantity DD 1 5 101 5 10 2222 1818 1414 1010 66 22 MRMR MCMC ATCATC Monopolistically Competitive SR
  • $$ QuantityQuantity DD 1 5 101 5 10 2222 1818 1414 1010 66 22 MRMR MCMC ATCATC Monopolistically Competitive SR
  • $$ QuantityQuantity DD 1 5 101 5 10 2222 1818 1414 1010 66 22 MRMR MCMC ATCATC Monopolistically Competitive SR
  • $$ QuantityQuantity DD 1 5 101 5 10 2222 1818 1414 1010 66 22 MRMR MCMC ATCATC Monopolistically Competitive SR
  • Monopolistically Competitive Firm’s Price, Quantity, and Profit Long Run
  • $$ QuantityQuantity1 5 101 5 10 2222 1818 1414 1010 66 22 Monopolistically Competitive LR
  • $$ QuantityQuantity DD 1 5 101 5 10 2222 1818 1414 1010 66 22 Monopolistically Competitive LR
  • $$ QuantityQuantity DD 1 5 101 5 10 2222 1818 1414 1010 66 22 MRMR Monopolistically Competitive LR
  • $$ QuantityQuantity DD 1 5 101 5 10 2222 1818 1414 1010 66 22 MRMR MCMC Monopolistically Competitive LR
  • $$ QuantityQuantity DD 1 5 101 5 10 2222 1818 1414 1010 66 22 MRMR MCMC ATCATC Monopolistically Competitive LR
  • $$ QuantityQuantity DD 1 5 101 5 10 2222 1818 1414 1010 66 22 MRMR MCMC ATCATC Monopolistically Competitive LR
  • Oligopoly A few large firms Products standardized or differentiated Difficult entry Knowledge not available to all firms
  • Oligopoly Industries Sugar Light bulbs Gas Steel Glass
  • Oligopoly Industries Autos Breakfast cereals Cigarette makers Soap Beer
  • Concentration Ratio A rough measure to gauge whether or not an industry is an oligopoly % of market the largest firms control Usually 4-8 firms
  • CR Example CR4 = % of market the largest 4 firms control Malt beverage industry CR4 = 90%
  • Pure Monopoly Only one seller in market Product totally differentiated No free entry or exit Imperfect information
  • Pure Monopoly Where a perfectly competitive firm is a price taker, the monopolist is a price searcher.
  • $$ QuantityQuantity PP** 1 5 101 5 10 Monopolist’s Demand Curve
  • $$ QuantityQuantity PP** DD 1 5 101 5 10 Monopolist’s Demand Curve
  • Monopoly Price, Quantity, and Revenue Schedules
  • $$ QuantityQuantity1 5 101 5 10 22 22 11 88 11 44 11 00 66 22 Monopoly
  • $$ QuantityQuantity DD 1 5 101 5 10 22 22 11 88 11 44 11 00 66 22 Monopoly
  • $$ QuantityQuantity DD 1 5 101 5 10 22 22 11 88 11 44 11 00 66 22 MRMR Monopoly
  • $$ QuantityQuantity DD 1 5 101 5 10 22 22 11 88 11 44 11 00 66 22 MRMR MCMC Monopoly
  • $$ QuantityQuantity DD 1 5 101 5 10 22 22 11 88 11 44 11 00 66 22 MRMR MCMC ATCATC Monopoly
  • $$ QuantityQuantity DD 1 5 101 5 10 22 22 11 88 11 44 11 00 66 22 MRMR MCMC ATCATC Monopoly
  • Monopoly Revenue Schedule Price Units sold Total Rev. Marg. Rev. $20 1 20 >16 $18 2 36 >12 $16 3 48 >8 $14 4 56 >4
  • Monopoly Revenue Schedule Price Units sold Total Rev. Marg. Rev. $12 5 60 >0 $10 6 60 >-4 $8 7 56
  • Efficiency Comparisons
  • The Growth of Firms Internal Growth External Growth
  • The Growth of Firms  Horizontal Mergers  Combinations of firms in the same industry  Vertical Mergers  Two or more firms in different production or marketing stages within the same industry.  Conglomerate mergers  Combinations of firms in unlike industries
  • Antitrust Laws Sherman Antitrust Act Section 1 makes it Illegal to act in restraint of trade Section 2 makes it illegal to monopolize interstate trade, forbidding the use of economic power.
  • Agricultural Bargaining The more the market is concentrated, the more power the larger firms have. A large number of farmers facing a single buyer could be an example. Farmers can resolve this situation by organizing themselves into an agricultural bargaining group.
  • Agricultural Bargaining Clayton Act started the process of giving farm groups immunity from Sherman Act. These farm groups must form as non-profit groups, and could not have capital stock.
  • Agricultural Bargaining  Capper Volstead Act of 1922 was sought to clarify that section of the Clayton act that applied to agriculture.  CV 1922 provided stock or nonstock corporations to operate provided:  They operated for the mutual benefit of their membership  They did not deal in the products of non-members to an amount greater in value than such as are handled by it for its members.  No member is allowed more than one vote  Association does not pay dividends on stock or membership capital in excess of 8 percent a year.  They can’t use their market power to enhance prices.