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Chapter 7 competition and the market

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  • 1. Competition and the Market Chapter 7
  • 2. 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?
  • 3. Markets can be characterized by how prices for goods and services are determined
  • 4. Major Market Structures Perfect competition Monopolistic competition Oligopoly Monopoly
  • 5. Forms of Market Competition Perfect Competition Monopoly Monopolistic Competition Oligopoly
  • 6. The Competitive Model The process of competition involves a rivalry among firms and is prevalent throughout our economy.
  • 7. The Competitive Model The state of competition is the end result of the competitive process under certain conditions.
  • 8. Factors Affecting the Form of Market Competition an Industry Expresses
  • 9. Factors The number and size distribution of buyers and sellers The degree of product differentiation
  • 10. Factors The extent of barriers to entry Amount of information available
  • 11. Factor #1: The number and size distribution of buyers and sellers
  • 12. Number and Size Distribution E.g. farmers and consumers 2 million farms in US 1.2 million are small with < $20,000 annual income
  • 13. 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.
  • 14. Number and Size Distribution The same can be said for consumers. Marketplace has many consumers and the vast majority consume small amounts.
  • 15. Factor #2: Product Differentiation
  • 16. Product Differentiation A competitive market is characterized by undifferentiated or homogeneous products.
  • 17. Product Differentiation Homogeneous or undifferentiated products cannot be distinguished from one another. E.g. No. 2 yellow corn
  • 18. Product Differentiation If you feed livestock and have two different corn sellers you can buy from, how do you determine which to buy from?
  • 19. Product Differentiation Grain elevator A No. 2 yellow corn $2.10/bu Grain elevator B No. 2 yellow corn $2.11/bu
  • 20. Product Differentiation What determines decision? Price! Identical product 5000 bu x $.01 less/bu = $50 savings by using elevator A
  • 21. Factor #3: Barriers to Entry
  • 22. Barriers to Entry Barriers are things that prevent other firms from entering the market.
  • 23. Barriers to Entry Economics of scale Absolute unit cost advantages Capital access cost
  • 24. Barriers to Entry Government policy Patents Commodity programs Import controls
  • 25. Factor #4: Perfect Knowledge and Information
  • 26. Knowledge and Info In a perfectly competitive market, firms would have same access to new knowledge and information about market prices, quantities, and quality.
  • 27. Profit Maximizing Entrepreneurial Firms For perfect competition to exist, firms must have a singular goal of profit maximization.
  • 28. The Profit Motive and the Results of Competition The competitive firm’s demand curve
  • 29. $$ QuantityQuantity The competitive firm’sThe competitive firm’s demand curvedemand curve
  • 30. $$ MR = D = PMR = D = P QuantityQuantity PPmm The competitive firm’sThe competitive firm’s demand curvedemand curve
  • 31. The optimal level of output for a competitive firm is determined where Marginal Revenue (MR) is equal to Marginal Cost (MC).
  • 32. $$ QuantityQuantity Optimal Output Level
  • 33. $$ MR = DMR = D QuantityQuantity PP** Optimal Output Level
  • 34. $$ MCMC MR = DMR = D QuantityQuantity PP** Optimal Output Level
  • 35. $$ MCMC MR = DMR = D QuantityQuantityQQ** PP** Optimal Output Level
  • 36. Average Total Cost (ATC) can be added to the graph to demonstrate the firm’s profit potential.
  • 37. 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.
  • 38. $$ QuantityQuantity Average Total Cost
  • 39. ATCATC $$ QuantityQuantity Average Total Cost
  • 40. Average Total Cost Price - ATC = Profit per unit of output Note: Price > ATC indicates a profit
  • 41. $$ QuantityQuantity
  • 42. $$ MR = DMR = D = P= P QuantityQuantity PP**
  • 43. $$ MCMC MR = DMR = D = P= P QuantityQuantityQ*Q* PP**
  • 44. $$ MCMC MR = DMR = D = P= P QuantityQuantity ATCATC PP**
  • 45. $$ MCMC MR = DMR = D = P= P QuantityQuantity ATCATC QQ** PP**
  • 46. ProfitProfit $$ MCMC MR = DMR = D = P= P QuantityQuantity ATCATC QQ** PP**
  • 47. Profit Price - ATC = Profit per unit of output Note: Price < ATC indicates a loss
  • 48. 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.
  • 49. $ or Price$ or Price SS DD QuantityQuantity PPee QQee
  • 50. $ or Price$ or Price SS DD QuantityQuantity PPee QQee SS
  • 51. Profit With the increase in Supply, price will be driven down. With the lower price, profits will be driven out.
  • 52. $$ QuantityQuantity
  • 53. $$ MR = DMR = D = P= P QuantityQuantity PP**
  • 54. $$ MCMC MR = DMR = D = P= P QuantityQuantity PP**
  • 55. $$ MCMC MR = DMR = D = P= P QuantityQuantity ATCATC PP**
  • 56. $$ MCMC MR = DMR = D = P= P QuantityQuantity ATCATC QQ** PP**
  • 57. $$ MCMC MR = DMR = D = P= P QuantityQuantity ATCATC QQ** PP** LossLoss
  • 58. $ or Price$ or Price SS DD QuantityQuantity PPee QQee
  • 59. $ or Price$ or Price SS DD QuantityQuantity PPee QQee SS
  • 60. Profit With the decrease in Supply, price will be driven up. With the higher price, the losses will be driven out.
  • 61. Market Price and Quantity
  • 62. What are the factors that generate the market price that firms use to make their production decisions?
  • 63. The interaction of the Market Supply and Market Demand curves will determine the price consumers will pay and producers will receive.
  • 64. Market Supply and Demand Relationship for a Competitive Market
  • 65. $ or Price$ or Price QuantityQuantity
  • 66. $ or Price$ or Price DD QuantityQuantity
  • 67. $ or Price$ or Price SS DD QuantityQuantity
  • 68. $ or Price$ or Price SS DD QuantityQuantity PPee QQ
  • 69. Specific Results of Competition Price takers Optimal output No product differentiation
  • 70. Specific Results of Competition Market equilibrium Technological advancements Efficiency
  • 71. Changes in Supply or Demand
  • 72. An Increase in Supply
  • 73. An Increase in Supply  Note the supply curve shifts to the right.  This lowers price and increases quantity supplied.
  • 74. An Increase in Supply  A decrease in supply would be represented by a shift of the supply curve to the left.
  • 75. $ or Price$ or Price QuantityQuantity
  • 76. $ or Price$ or Price DD QuantityQuantity
  • 77. $ or Price$ or Price SS DD QuantityQuantity
  • 78. $ or Price$ or Price SS DD QuantityQuantity PP QQ
  • 79. $ or Price$ or Price SS DD QuantityQuantity PP QQ SS11
  • 80. $ or Price$ or Price SS DD QuantityQuantity PP QQ SS11 PP11 QQ11
  • 81. Supply Shifters Input Costs Prices of Related Goods Technology Weather Number of Sellers Taxes Expectations
  • 82. An Increase in Demand
  • 83. $ or Price$ or Price QuantityQuantity
  • 84. $ or Price$ or Price DD QuantityQuantity
  • 85. $ or Price$ or Price SS DD QuantityQuantity
  • 86. $ or Price$ or Price SS DD QuantityQuantity PP QQ
  • 87. $ or Price$ or Price SS DD QuantityQuantity PP QQ DD11
  • 88. $ or Price$ or Price SS DD QuantityQuantity PP QQ DD11 PP11 QQ11
  • 89. An Increase in Demand Note Demand Curve shifts right Increases price Increases quantity demanded
  • 90. A Decrease in Demand Demand Curve would shift left Decreases price Decreases quantity demanded
  • 91. Demand Shifters Income Population Tastes and Preferences Prices of Related Goods Expectations
  • 92. Agriculture’s Competitive Side 2.1 mil farms Homogeneous products Freedom of entry and exit Information is available
  • 93. Agriculture’s Departure from Competition Soviet grain deal of 1973 Marketing cooperatives High land prices Technology availability
  • 94. Models of Imperfect Competition
  • 95. Imperfect competition exists whenever a firm has some control over the price it charges for its product.
  • 96. Forms of Competition PerfectPerfect CompetitionCompetition MonopolyMonopoly MonopolisticMonopolistic CompetitionCompetition OligopolyOligopoly Imperfect CompetitionImperfect Competition
  • 97. Monopolistic Competition Many sellers in market Differentiated products Ease of entry or exit Information is readily available
  • 98. Monopolistic Competition Non-price competition usually occurs
  • 99. $$ QuantityQuantity1 5 101 5 10 Monopolistic Competitor Demand Curve
  • 100. $$ QuantityQuantity DD 1 5 101 5 10 Monopolistic Competitor Demand Curve
  • 101. Monopolistically Competitive Firm’s Price, Quantity, and Profit Short Run
  • 102. $$ QuantityQuantity 1 5 101 5 10 2222 1818 1414 1010 66 22 Monopolistically Competitive SR
  • 103. $$ QuantityQuantity DD 1 5 101 5 10 2222 1818 1414 1010 66 22 Monopolistically Competitive SR
  • 104. $$ QuantityQuantity DD 1 5 101 5 10 2222 1818 1414 1010 66 22 MRMR Monopolistically Competitive SR
  • 105. $$ QuantityQuantity DD 1 5 101 5 10 2222 1818 1414 1010 66 22 MRMR MCMC Monopolistically Competitive SR
  • 106. $$ QuantityQuantity DD 1 5 101 5 10 2222 1818 1414 1010 66 22 MRMR MCMC ATCATC Monopolistically Competitive SR
  • 107. $$ QuantityQuantity DD 1 5 101 5 10 2222 1818 1414 1010 66 22 MRMR MCMC ATCATC Monopolistically Competitive SR
  • 108. $$ QuantityQuantity DD 1 5 101 5 10 2222 1818 1414 1010 66 22 MRMR MCMC ATCATC Monopolistically Competitive SR
  • 109. $$ QuantityQuantity DD 1 5 101 5 10 2222 1818 1414 1010 66 22 MRMR MCMC ATCATC Monopolistically Competitive SR
  • 110. Monopolistically Competitive Firm’s Price, Quantity, and Profit Long Run
  • 111. $$ QuantityQuantity1 5 101 5 10 2222 1818 1414 1010 66 22 Monopolistically Competitive LR
  • 112. $$ QuantityQuantity DD 1 5 101 5 10 2222 1818 1414 1010 66 22 Monopolistically Competitive LR
  • 113. $$ QuantityQuantity DD 1 5 101 5 10 2222 1818 1414 1010 66 22 MRMR Monopolistically Competitive LR
  • 114. $$ QuantityQuantity DD 1 5 101 5 10 2222 1818 1414 1010 66 22 MRMR MCMC Monopolistically Competitive LR
  • 115. $$ QuantityQuantity DD 1 5 101 5 10 2222 1818 1414 1010 66 22 MRMR MCMC ATCATC Monopolistically Competitive LR
  • 116. $$ QuantityQuantity DD 1 5 101 5 10 2222 1818 1414 1010 66 22 MRMR MCMC ATCATC Monopolistically Competitive LR
  • 117. Oligopoly A few large firms Products standardized or differentiated Difficult entry Knowledge not available to all firms
  • 118. Oligopoly Industries Sugar Light bulbs Gas Steel Glass
  • 119. Oligopoly Industries Autos Breakfast cereals Cigarette makers Soap Beer
  • 120. 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
  • 121. CR Example CR4 = % of market the largest 4 firms control Malt beverage industry CR4 = 90%
  • 122. Pure Monopoly Only one seller in market Product totally differentiated No free entry or exit Imperfect information
  • 123. Pure Monopoly Where a perfectly competitive firm is a price taker, the monopolist is a price searcher.
  • 124. $$ QuantityQuantity PP** 1 5 101 5 10 Monopolist’s Demand Curve
  • 125. $$ QuantityQuantity PP** DD 1 5 101 5 10 Monopolist’s Demand Curve
  • 126. Monopoly Price, Quantity, and Revenue Schedules
  • 127. $$ QuantityQuantity1 5 101 5 10 22 22 11 88 11 44 11 00 66 22 Monopoly
  • 128. $$ QuantityQuantity DD 1 5 101 5 10 22 22 11 88 11 44 11 00 66 22 Monopoly
  • 129. $$ QuantityQuantity DD 1 5 101 5 10 22 22 11 88 11 44 11 00 66 22 MRMR Monopoly
  • 130. $$ QuantityQuantity DD 1 5 101 5 10 22 22 11 88 11 44 11 00 66 22 MRMR MCMC Monopoly
  • 131. $$ QuantityQuantity DD 1 5 101 5 10 22 22 11 88 11 44 11 00 66 22 MRMR MCMC ATCATC Monopoly
  • 132. $$ QuantityQuantity DD 1 5 101 5 10 22 22 11 88 11 44 11 00 66 22 MRMR MCMC ATCATC Monopoly
  • 133. 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
  • 134. Monopoly Revenue Schedule Price Units sold Total Rev. Marg. Rev. $12 5 60 >0 $10 6 60 >-4 $8 7 56
  • 135. Efficiency Comparisons
  • 136. The Growth of Firms Internal Growth External Growth
  • 137. 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
  • 138. 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.
  • 139. 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.
  • 140. 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.
  • 141. 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.