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Chapter 7 competition and the market
The document discusses different market structures including perfect competition, monopoly, monopolistic competition, and oligopoly. It provides details on key characteristics of each market structure such as the number of buyers and sellers, level of product differentiation, barriers to entry, and availability of information. Graphs and diagrams are used to illustrate concepts like competitive firm profit maximization by producing at the quantity where marginal revenue equals marginal cost. The impacts of supply and demand shifts on market equilibrium price and quantity are also examined.
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Chapter 7 competition and the market
- 1.
- 2. The function ofPrice 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 becharacterized by how prices for goods and services are determined
- 4. Major Market Structures Perfectcompetition Monopolistic competition Oligopoly Monopoly
- 5. Forms of MarketCompetition Perfect Competition Monopoly Monopolistic Competition Oligopoly
- 6. The Competitive Model Theprocess of competition involves a rivalry among firms and is prevalent throughout our economy.
- 7. The Competitive Model Thestate of competition is the end result of the competitive process under certain conditions.
- 8. Factors Affecting theForm of Market Competition an Industry Expresses
- 9. Factors The number andsize distribution of buyers and sellers The degree of product differentiation
- 10. Factors The extent ofbarriers to entry Amount of information available
- 11. Factor #1: The numberand size distribution of buyers and sellers
- 12. Number and SizeDistribution E.g. farmers and consumers 2 million farms in US 1.2 million are small with < $20,000 annual income
- 13. Number and SizeDistribution 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 SizeDistribution The same can be said for consumers. Marketplace has many consumers and the vast majority consume small amounts.
- 15.
- 16. Product Differentiation A competitivemarket is characterized by undifferentiated or homogeneous products.
- 17. Product Differentiation Homogeneous orundifferentiated products cannot be distinguished from one another. E.g. No. 2 yellow corn
- 18. Product Differentiation If youfeed 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 determinesdecision? Price! Identical product 5000 bu x $.01 less/bu = $50 savings by using elevator A
- 21.
- 22. Barriers to Entry Barriersare things that prevent other firms from entering the market.
- 23. Barriers to Entry Economicsof scale Absolute unit cost advantages Capital access cost
- 24. Barriers to Entry Governmentpolicy Patents Commodity programs Import controls
- 25. Factor #4: Perfect Knowledgeand Information
- 26. Knowledge and Info Ina perfectly competitive market, firms would have same access to new knowledge and information about market prices, quantities, and quality.
- 27. Profit Maximizing Entrepreneurial Firms Forperfect competition to exist, firms must have a singular goal of profit maximization.
- 28. The Profit Motive andthe Results of Competition The competitive firm’s demand curve
- 29. $$ QuantityQuantity The competitive firm’sThecompetitive firm’s demand curvedemand curve
- 30. $$ MR = D= PMR = D = P QuantityQuantity PPmm The competitive firm’sThe competitive firm’s demand curvedemand curve
- 31. The optimal levelof output for a competitive firm is determined where Marginal Revenue (MR) is equal to Marginal Cost (MC).
- 32.
- 33. $$ MR = DMR= D QuantityQuantity PP** Optimal Output Level
- 34. $$ MCMC MR =DMR = D QuantityQuantity PP** Optimal Output Level
- 35. $$ MCMC MR =DMR = D QuantityQuantityQQ** PP** Optimal Output Level
- 36. Average Total Cost(ATC) can be added to the graph to demonstrate the firm’s profit potential.
- 37. Average Total Cost Theper unit cost of producing a specific good. The difference between ATC and product’s price equals the profit per unit of product.
- 38.
- 39.
- 40. Average Total Cost Price- ATC = Profit per unit of output Note: Price > ATC indicates a profit
- 41.
- 42. $$ 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 isimportant 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 increasein Supply, price will be driven down. With the lower price, profits will be driven out.
- 52.
- 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 decreasein Supply, price will be driven up. With the higher price, the losses will be driven out.
- 61. Market Price andQuantity
- 62. What are thefactors that generate the market price that firms use to make their production decisions?
- 63. The interaction ofthe Market Supply and Market Demand curves will determine the price consumers will pay and producers will receive.
- 64. Market Supply andDemand 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 Pricetakers Optimal output No product differentiation
- 70. Specific Results of Competition Marketequilibrium Technological advancements Efficiency
- 71. Changes in Supply orDemand
- 72.
- 73. An Increase inSupply Note the supply curve shifts to the right. This lowers price and increases quantity supplied.
- 74. An Increase inSupply 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 Pricesof Related Goods Technology Weather Number of Sellers Taxes Expectations
- 82.
- 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 inDemand Note Demand Curve shifts right Increases price Increases quantity demanded
- 90. A Decrease inDemand Demand Curve would shift left Decreases price Decreases quantity demanded
- 91. Demand Shifters Income Population Tastes andPreferences Prices of Related Goods Expectations
- 92. Agriculture’s Competitive Side 2.1mil farms Homogeneous products Freedom of entry and exit Information is available
- 93. Agriculture’s Departure from Competition Sovietgrain deal of 1973 Marketing cooperatives High land prices Technology availability
- 94.
- 95. Imperfect competition exists whenevera firm has some control over the price it charges for its product.
- 96.
- 97. Monopolistic Competition Many sellersin market Differentiated products Ease of entry or exit Information is readily available
- 98. Monopolistic Competition Non-price competitionusually occurs
- 99. $$ QuantityQuantity1 5 1015 10 Monopolistic Competitor Demand Curve
- 100. $$ QuantityQuantity DD 1 5 1015 10 Monopolistic Competitor Demand Curve
- 101. Monopolistically Competitive Firm’s Price, Quantity,and Profit Short Run
- 102. $$ QuantityQuantity 1 5 1015 10 2222 1818 1414 1010 66 22 Monopolistically Competitive SR
- 103. $$ QuantityQuantity DD 1 5 1015 10 2222 1818 1414 1010 66 22 Monopolistically Competitive SR
- 104. $$ QuantityQuantity DD 1 5 1015 10 2222 1818 1414 1010 66 22 MRMR Monopolistically Competitive SR
- 105. $$ QuantityQuantity DD 1 5 1015 10 2222 1818 1414 1010 66 22 MRMR MCMC Monopolistically Competitive SR
- 106. $$ QuantityQuantity DD 1 5 1015 10 2222 1818 1414 1010 66 22 MRMR MCMC ATCATC Monopolistically Competitive SR
- 107. $$ QuantityQuantity DD 1 5 1015 10 2222 1818 1414 1010 66 22 MRMR MCMC ATCATC Monopolistically Competitive SR
- 108. $$ QuantityQuantity DD 1 5 1015 10 2222 1818 1414 1010 66 22 MRMR MCMC ATCATC Monopolistically Competitive SR
- 109. $$ QuantityQuantity DD 1 5 1015 10 2222 1818 1414 1010 66 22 MRMR MCMC ATCATC Monopolistically Competitive SR
- 110. Monopolistically Competitive Firm’s Price, Quantity,and Profit Long Run
- 111. $$ QuantityQuantity1 5 1015 10 2222 1818 1414 1010 66 22 Monopolistically Competitive LR
- 112. $$ QuantityQuantity DD 1 5 1015 10 2222 1818 1414 1010 66 22 Monopolistically Competitive LR
- 113. $$ QuantityQuantity DD 1 5 1015 10 2222 1818 1414 1010 66 22 MRMR Monopolistically Competitive LR
- 114. $$ QuantityQuantity DD 1 5 1015 10 2222 1818 1414 1010 66 22 MRMR MCMC Monopolistically Competitive LR
- 115. $$ QuantityQuantity DD 1 5 1015 10 2222 1818 1414 1010 66 22 MRMR MCMC ATCATC Monopolistically Competitive LR
- 116. $$ QuantityQuantity DD 1 5 1015 10 2222 1818 1414 1010 66 22 MRMR MCMC ATCATC Monopolistically Competitive LR
- 117. Oligopoly A few largefirms Products standardized or differentiated Difficult entry Knowledge not available to all firms
- 118.
- 119. Oligopoly Industries Autos Breakfast cereals Cigarettemakers Soap Beer
- 120. Concentration Ratio A roughmeasure to gauge whether or not an industry is an oligopoly % of market the largest firms control Usually 4-8 firms
- 121. CR Example CR4 =% of market the largest 4 firms control Malt beverage industry CR4 = 90%
- 122. Pure Monopoly Only oneseller in market Product totally differentiated No free entry or exit Imperfect information
- 123. Pure Monopoly Where aperfectly competitive firm is a price taker, the monopolist is a price searcher.
- 124. $$ QuantityQuantity PP** 1 5 1015 10 Monopolist’s Demand Curve
- 125. $$ QuantityQuantity PP** DD 1 5 1015 10 Monopolist’s Demand Curve
- 126. Monopoly Price, Quantity, andRevenue Schedules
- 127. $$ QuantityQuantity1 5 1015 10 22 22 11 88 11 44 11 00 66 22 Monopoly
- 128. $$ QuantityQuantity DD 1 5 1015 10 22 22 11 88 11 44 11 00 66 22 Monopoly
- 129. $$ QuantityQuantity DD 1 5 1015 10 22 22 11 88 11 44 11 00 66 22 MRMR Monopoly
- 130. $$ QuantityQuantity DD 1 5 1015 10 22 22 11 88 11 44 11 00 66 22 MRMR MCMC Monopoly
- 131. $$ QuantityQuantity DD 1 5 1015 10 22 22 11 88 11 44 11 00 66 22 MRMR MCMC ATCATC Monopoly
- 132. $$ QuantityQuantity DD 1 5 1015 10 22 22 11 88 11 44 11 00 66 22 MRMR MCMC ATCATC Monopoly
- 133. Monopoly Revenue Schedule PriceUnits 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 PriceUnits sold Total Rev. Marg. Rev. $12 5 60 >0 $10 6 60 >-4 $8 7 56
- 135.
- 136. The Growth ofFirms Internal Growth External Growth
- 137. The Growth ofFirms 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 AntitrustAct 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 morethe 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 Actstarted 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 CapperVolstead 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.