Presentation is loading. Please wait.

Presentation is loading. Please wait.

Level 5 Economics: Theory of the Firm [3] Economic Principles Economic Principles Economic Environment Economic Environment Imperfect Competition Imperfect.

Similar presentations


Presentation on theme: "Level 5 Economics: Theory of the Firm [3] Economic Principles Economic Principles Economic Environment Economic Environment Imperfect Competition Imperfect."— Presentation transcript:

1 Level 5 Economics: Theory of the Firm [3] Economic Principles Economic Principles Economic Environment Economic Environment Imperfect Competition Imperfect Competition

2 Level 5 Economics: Theory of the Firm [3] Learning Outcome Three Theory of the Firm: 3.Imperfect Competition

3 Tiwai Point Aluminium Smelter – Meridian's biggest customer Wikimedia Commons

4 barriers to entry into a market give existing suppliers market power barriers to entry into a market give existing suppliers market power – high capital costs / economies of scale – technological expertise registration systems / licensing / examinations – patents / copyrights: "Intellectual Property Rights" incl. trademarks: names and symbols (silver fern?) – franchising / dealerships parallel importing – dealer networks bypassed – excessive government regulations ("red tape") – use of market power predatory pricing, control of inputs [examples?] Barriers to Industry Entry limit Competition S & R, S ch.6 diamonds, pounamu (NZ jade), local landline

5 Exercise Form groups of 2 or 3. Imagine you plan to start a new business. Think of 2 industries in New Zealand or in your home country in which it would be extremely difficult for your new firm to enter the market. Are some markets within that industry easier for a new firm to enter than others?

6 Efficient and Competitive Markets Efficient Market for a commodity Efficient Market for a commodity – Price = Minimum Average Cost = Marginal Benefit = Marginal Cost [accounting for benefits to consumers and other parties] [accounting for costs to producers and other parties] Perfectly Competitive Market Perfectly Competitive Market – is efficient, without government intervention there are no "other parties"; only consumers, producers Imperfectly Competitive Market Imperfectly Competitive Market – without government help, is not efficient

7 Monopoly market with a single seller – a price-maker market with a single seller – a price-maker – absence of competitors gives monopoly firms market power the most imperfect form of competition the most imperfect form of competition – NZ examples: NZ Bus, Auckland Airport (AIA), VectorVector competitive forces arise from substitutes – not all substitutes are obvious; eg home renovation may be a substitute for overseas holidays labour monopolies: unions and societies Natural Monopoly Natural Monopoly – where large economies of scale exist Mankiw fig 1fig 1 – technical efficiencies maximised if just one firm

8 Revenue curves for perfect competition and monopoly for perfect competition marginal revenue is constant because S & R, S fig 6.2 (reminder)fig 6.2 – each firm is too small to influence the market supply curve – hence the perfectly competitive firm cannot, on its own, influence the equilibrium market price a monopolist's marginal revenue curve is downward sloping a monopolist's marginal revenue curve is downward sloping S & R, S fig 6.3fig 6.3 – a monopolist's output is also the market's output an increase in a monopolist's supply reduces the market price Impact on price: competition and monopoly compared.

9 Equilibrium of the Firm; Imperfect Competition applying the MC=MR rule to establish Q e applying the MC=MR rule to establish Q e Profit ( ) equals total revenue (TR) minus total cost (TC) Profit ( ) equals S & R, S fig 7.10 total revenue (TR) minus total cost (TC) firms maximise profit when marginal revenue (MR) equals marginal cost (MC) firms maximise profit when S & R, S fig 7.11 marginal revenue (MR) equals marginal cost (MC)fig 7.11 – under imperfect competition, MR < price AR and MR slope down to the right firm's equilibrium, Imperfect Competition firm's equilibrium, Imperfect Competition – above-normal profits apply and persist S & R, S fig 7.12afig 7.12a

10 monopoly Imperfect competition esp. monopoly. = price for a given Q = price for a given Q fig 4 Mankiw (new fig 7.12a)new Fig 7.12a

11 Multichoice Exercise Exercise

12 Monopolistic Competition Monopolistic Competition S & R, S end of ch.7 industry includes small firms industry includes small firms – commonly includes larger firms as well eg restaurants and fast food (McDonalds) product differentiation / variation 7.15 product differentiation / variation S & R fig 7.18, S 7.15fig 7.18 – eg Nike, Levis etc market leaders through successful branding – marketing strategy designed to raise demand for brand and thereby to avoid price-cutting successful brand variant enjoys less elastic demand – differentiation can be achieved also by levels of personal service, reputation etc. most well-known firms are monopolistic competitors most well-known firms are monopolistic competitors

13 Oligopoly / Duopoly Oligopoly / Duopoly S & R, S end of ch.7 few sellers / two sellers[large size firms] few sellers / two sellers[large size firms] – individual firms' supply each affect price examples examples ».». high barriers to market entry lead to oligopoly high barriers to market entry lead to oligopoly oligopolist firms compete for market share oligopolist firms compete for market share – each rival firm happy to supply more (as economies of scale are common), but not happy for an increase in industry supply to force prices down price competition price wars, extreme case price competition [price wars, extreme case] – works only in short-term as rivals soon respond banking, supermarkets, newspapers, energy production and retailing

14 Holding Companies & Mergers common ownership through holding companies reduces competition common ownership through holding companies reduces competition – eg The Warehouse Group; other examples? mergers have to be approved in NZ by the mergers have to be approved in NZ by the Commerce Commission Cartel: a colluding oligopoly Monopsony: single buyer single buyer – Fonterra (dairy), Zespri (kiwifruit) in NZ globally, these are Monopolistic Competitors

15 Natural Monopoly when a single firm can supply the whole market while experiencing decreasing costs fig 7.18 when a single firm can supply the whole market while experiencing decreasing costs S & R fig 7.15 p.136, S fig 7.18 p.156 (eg Vector)fig 7.15Vector – especially where large networks exist – competition would force each firm to produce at an above-optimal cost (ie on the left side of the LAC curve) monopoly is not always bad monopoly is not always bad – natural monopolies are usually publicly owned or subject to price regulation to improve their economic efficiencyeconomic efficiency – high cost industries with social benefits will often only be provided by a monopoly 8.1 to operate efficiently, a subsidy may be needed fig 8.2, 8.1fig fig 7.14, 7.17 for price regulation fig 7.14

16 Contrasting effects of Perfect and Imperfect Competition Market Concentration Ratios Market Concentration Ratios – many industries fall between oligopoly and monopolistic competition, with market leaders – monopoly = 1; perfect competition = 0 Evaluation of differences Evaluation of differences S & R, S Table 8.1Table 8.1 – imperfect competition can be made more efficient through policy intervention competition creates marketing industry dynamic competition – rivalry – creates change Issue to think about Issue to think about – do Google and Facebook dominate the Internet?

17

18 Efficient Outcome for Society if Price (ie Average Revenue) = Marginal Cost – price is the marginal benefit of a private good (T4) "price (AR) = marginal cost" is a condition for efficiency for society as a whole for a 'private good' "price (AR) = marginal cost" is a condition for efficiency for society as a whole for a 'private good' – otherwise, efficiency gains can be realised: price > marginal cost if price > marginal cost, there will be increased net benefits if more resources are allocated to that good net benefits price < marginal cost if price < marginal cost, there will be increased net benefits if fewer resources are allocated to that good and more resources are allocated to other goods – a market is efficient if a change in the quantity produced cannot lead to efficiency gains back

19 Net Benefits Consumer (household) point of view Consumer (household) point of view happiness – unhappiness = individual welfare Producer (firm) point of view Producer (firm) point of view total revenue – total cost = profit Social point of view Social point of view total benefit – total cost = societal welfare back

20 Average Revenue Curves, firms in industries with different levels of competition 20% increase in firms output; what happens to price?

21 back Duopoly Oligopoly Monopoly Average Revenue Curves, Firms in Industries with different levels of competition

22 back Average Revenues of Competitive Firms $1.00 $3.00 $ output (Q) of individual firm market-clearing price (P) per item sold Monopolistic Competition; Average Revenues for individual brands are like this.

23 Note KR : "Average Total Cost" here means what we call "Long-Run Average Cost" (LAC)LAC from Mankiw, Principles of Economics (4e), p.315

24 economies of scale diseconomies of scale eg large Supermarket eg Dairy eg Superette eg small Supermarket $ back return Example of a Long-Run Average Cost Curve Example of a Long-Run Average Cost Curve LAC S & R ch.5

25 back Advertisement from Auckland City Harbour News 25 August 2004 natural monopoly

26 back Dynamic vs. Static Efficiency


Download ppt "Level 5 Economics: Theory of the Firm [3] Economic Principles Economic Principles Economic Environment Economic Environment Imperfect Competition Imperfect."

Similar presentations


Ads by Google