Agri 2312 chapter 9 market equilibrium and product price imperfect competition

Market Equilibrium and Market Demand: Imperfect Competition Chapter 9

Discussion Topics Market structure characteristics Imperfect competition in selling Imperfect competition in buying Market structure in livestock industry Governmental regulatory measures

Market Structure Characteristics Number of firms and size distribution Product differentiation Barriers to entry Picture here tells a tale of two markets (no. 2 yellow corn vs. farm equipment) Pages 145-148

Perfect Competition Up to now we have been assuming the firm and market reflect the conditions of perfect competition … farmers come close as anybody to meeting these conditions. A large number of small firms (2 million farms) A homogeneous product (no. 2 yellow corn) Freely mobile resources (no barriers to entry caused by patents, etc. or barriers to exit) Perfect knowledge of market conditions (quality outlook information from government and university sources)

Merging Demand and Supply Price Quantity D S P E Q E Chapters 6-7 Chapters 3-5 Chapter 8

Firm is a “Price Taker” Under Perfect Competition Price Quantity D S P E Q E Price O MAX AVC MC The Market The Firm

If Demand Increases…… Price Quantity D S P E Q E Price AVC MC The Market The Firm 10 11 D 1

If Demand Decreases…… Price Quantity D S P E Q E Price AVC MC The Market The Firm 9 10 D 2

Firm is a “Price Taker” in the Input Market Price Quantity D S P E Q E Price L MAX MVP MIC Labor Market The Firm

Firm is a “Price Taker” in the Input Market Wage rate Quantity D S P E Q E Price L MAX MVP MIC Labor Market The Firm

Effects of Increasing the Minimum Wage Price Quantity D S P MIN Q D Price L MAX MVP MIC Labor Market The Firm Q S Market surplus

Imperfect Competition Many of the markets in which farmers buy inputs and sell their products however do not meet these conditions This chapter initially focuses on specific types of imperfect competitors in the farm input market, where firms are capable of setting the prices farmers must pay for specific inputs to their production.

Imperfect Competition in Selling

Unlike perfect competitors who face a perfectly elastic demand curve, imperfect competitors selling a differentiated product benefit from a downward sloping demand curve Page 150

See table 11-1 on page 199 The marginal revenue in this instance is also downward sloping, and goes to zero at the point where total revenue peaks

Types of Imperfect Competitors in Input Markets Monopolistic competition Oligopoly Monopoly Let’s start here…

Monopolistic Competitors Many sellers Ability to differentiate product by advertising and sales promotions Profits can exist in the short run, but others bid them away in the long run Equate MC with MR, but price off the downward sloping demand curve Page 148-151

Short run profits . The firm produces Q SR where MR=MC at E above, but prices its products at P SR by reading off the demand curve which reveals consumer willingness to pay Page 150

Short run loss . The firm suffers a loss in the current period following the same strategy of operating at Q SR given by MC=MR at point E. Page 150

At quantity Q SR , average total cost (ATC SR ) is greater than P SR , which creates the loss depicted above… Page 150

In the long run, profits are bid away as more firms enter the market. Or losses will no longer exist as firms leave the market. At Q LR , the remaining firms are just breaking even as shown by the lack of gap between the demand curve and ATC curve. Page 151

Top 10 Burger Restaurants Page 152 Imperfect competition you face weekly

Oligopolies A few number of sellers Non-price competition between oligopolists Match price cuts but not price increases by fellow oligopolists Like monopolistic competitors, they have some ability to set market prices Pages 152-155

Demand curve DD represents the case when all oligopolists move prices together and share the market.

Why? Rival oligololists will match price cuts but not price increases in the short run because they want to capture a larger market share. Demand curve dd represents the case when a single firm changes its price above P e at point 1. This leads to a kinked demand curve d1D and a discontinuous marginal revenue curve.

Meeting demand along the lower segment of the kinked demand curve, the firm is maintaining its market share.

Note that shifting MC curves reflecting technological advances will not affect P E and Q E . It does affect profit however (MC drops from point 3 to point 4).

Examples of Oligopolists Farm machinery manufacturers Domestic automobile industry Domestic airline industry Pesticide and fertilizer industry Products sold are largely identified or differentiated by company brand or name.

Monopolies Only seller in the market Entry of other firms is restricted by patents, etc. They have absolute power over setting market price They produce a unique product They can make economic profits in the long run because they can set price without competition. Page 155-156

Total revenue is equal to the area 0P E CQ E , which forms the blue box to the left… Notice the monopoly, like the previous forms of imperfect competition, produces where MC=MR (point A), but then reads up to the demand curve (point C) when setting price P E .

Total variable costs for the monopolist is equal to area 0NAQ E , or the yellow box to the left.

Total fixed costs for the monopolist is equal to area NMBA, or the green box to the left…

Total cost is therefore equal to area 0MBQ E , or the green box plus the yellow box to the left

Finally, the economic profit earned by the monopolist is equal to area MP E CB, or total revenue (blue box) minus total costs (green box plus yellow box).

Let’s compare a monopoly with perfect competition from an economic welfare perspective

Consumer surplus under perfect competition is equal to the sum of areas 1, 4, 5, 8 and 9, or the blue triangle to the left Perfect Competition Case

Producer surplus under perfect competition is equal to the sum of areas 2, 3, 6 and 7, or the green triangle to the left Perfect Competition Case

Total economic surplus under perfect competition is therefore equal to the blue and green triangles to the left, or the sum of areas 1 through 9. Perfect Competition Case

Consumer surplus under a monopoly is equal to the sum of areas 8 and 9, or the new blue triangle to the left Thus, consumers would be economically worse-off by areas 1, 4 and 5 under a monopoly. They are paying a higher price P M for a smaller quantity Q M . Monopoly Case

Producer surplus under A monopoly is equal to the sum of areas 3, 4, 5, 6 and 7, or the green area to the left. Thus, producers lose area 2 but gain areas 4+5, making them economically better-off than perfect competitors Monopoly Case

Finally, society as a whole would be economically worse-off by areas 1+2. This is called a dead weight loss. This reflects the fact that less of the economy’s available resources in this market are being used to provide products to consumers…. Monopoly Case

Summary of imperfect competitors from a selling perspective Page 157

Imperfect Competition in Buying

Types of Imperfect Competitors on the Buying Side Monopsonistic competition Oligopsony Monopsony Let’s start here…

Monopsonies Single buyer in the market Focus is on the marginal input cost of purchasing an addition unit of resources Will equate MVP=MIC when making buying decisions As long as MVP >MIC, the monopsonist makes a profit Page 158-160

Marginal revenue product same as marginal value product under perfect competition. Buying Decisions by Perfect Competitors

Buying Decisions by Perfect Competitors Review graph on page 161 in Chapter 7 for more background on the MVP=MIC concept

Buying Decisions by a Monopsonist Monopsonist makes decesions along the marginal reveuve product curve, which now differs from MVP. The firm will equate MRP=MIC at point A and decide to buy quantity Q M

Buying Decisions by a Monopsonist This causes price to fall from P PC to P M which is referred to as monopsonistic explotation .

Case #1 : Monopsonist in buying and sole seller of product. Equilibrium is where MRP=MIC at Point A. Pricing off supply curve gives Q MM and P MM .

Case #2 : Perfect competition in buying but monopoly in selling. Equilibrium is where MRP=Supply at Point C which gives Q PCM and P PCM .

Case #3 : Perfect competition in selling but monopsony in buying. Equilibrium is where MVP=MIC at Point E. Pricing off supply curve gives Q MPC and P MPC .

Case #4 : Perfect competition in both selling and buying. Equilibrium is where MVP=Supply at Point F which gives Q PC and P PC .

Monopsonistic Competitors Many firms buying resources Ability to differentiate services to producers Differentiated services includes distribution convenience and location of facilities, willingness to provide credit or technical assistance P and Q determined same as monopsonist Page 161

Oligopsonies A few number of buyers of a resource Profit earned will depend on elasticity of supply for resource (less elastic than monopsonistic competition Each oligopsonist knows fellow oligopsonists will respond to changes in price or quantity it might initiate P and Q determined same as monopsonist Page 161

Various segments of the livestock industry Exhibit several forms of imperfect competition.

Governmental Regulatory Measures Various approaches have been taken over time to Counteract adverse effects of imperfect competition In the marketplace. These include 1.Legislative acts passed by Congress, including the Sherman Antitrust Act 2.Price ceilings 3.Lump-sum Tax 4.Minimum price or floors Page 162

#1:Legislative Acts Sherman Antitrust Act Packers and Stockyards Act Cooperative Marketing Act Robinson-Patman Act Agricultural Marketing Agreement Act

#2: Implications of a Price Ceiling Without regulatory interference, the monopolist will equate MR and MC at point C, produce Q M and charge price P M .

#2: Implications of a Price Ceiling The monopolist’s profit is equal to AP M BC or the blue box to the left.

#2: Implications of a Price Ceiling If government imposes a price ceiling P MAX , the demand curve is given by P MAX ED. This is also MR up to Q 1 . Beyond Q1, FG becomes the MR curve.

#2: Implications of a Price Ceiling The price ceiling has the effect of of causing the monopolist to produce more (Q 1 >Q M ) at a lower price (P MAX <P M ).

#2: Implications of a Price Ceiling The monopolist’s profit falls to area IP MAX EH or green box above.

#3: Implications of Lump-Sum Tax The monopolist equates MC=MR at point F, producing Q M , and reading up to the demand curve at point B and charging P M .

#3: Implications of Lump-Sum Tax The lump-sum tax on the monopolist raises the firm’s average total costs from ATC 1 to ATC 2 . This lowers the monopolist’s producer surplus from AP M BC to EP M BT, but does not change its level of output or price.

#3: Implications of Lump-Sum Tax The lump-sum tax on the monopolist raises the firm’s average total costs from ATC 1 to ATC 2 . This lowers the monopolist’s producer surplus from AP M BC to EP M BT, but does not change its level of output or price. The loss in producer surplus is area AETC or blue box above.

#4: Implications of Minimum Price Without a minimum price, the monopsonist would equate MRP=MIC and employ Q M units of the input and pay P M .

#4: Implications of Minimum Price If a minimum price P F is imposed (think of a minimum wage rate), the monopsonist’s MIC curve would be P F DCB. Here the firm would actually employ more of the resource.

Summary Unlike perfect competition, imperfect competitors have ability to influence price . Monopolistic competitors try to differentiate their product. Monopolists are the only seller in their product market. Monopsonists are the only buyer . Oligopolies are a few number of sellers while oligopsonies are a few number of buyers . Know the economic welfare implications of imperfect competition.

Chapter 10 focuses resource use in agriculture and the environment ….

Agri 2312 chapter 9 market equilibrium and product price imperfect competition

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Agri 2312 chapter 9 market equilibrium and product price imperfect competition