Chapter 7 competition and the market

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Chapter 7 competition and the market

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

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