Presentation on theme: "Level 5 Economics: Theory of the Firm "— Presentation transcript:
1Level 5 Economics: Theory of the Firm  Imperfect CompetitionEconomic PrinciplesEconomic Environment
2Level 5 Economics: Theory of the Firm  Learning Outcome ThreeTheory of the Firm:Imperfect Competition
3Tiwai Point Aluminium Smelter – Meridian's biggest customer Wikimedia Commons
4Barriers to Industry Entry limit Competition barriers to entry into a market give existing suppliers market powerhigh capital costs / economies of scaletechnological expertiseregistration systems / licensing / examinationspatents / copyrights: "Intellectual Property Rights"incl. trademarks: names and symbols (silver fern?)franchising / dealershipsparallel importing – dealer networks bypassedexcessive government regulations ("red tape")use of market powerpredatory pricing, control of inputs [examples?]S&R, S ch.6diamonds, pounamu (NZ jade), local landline
5Imperfect Competition Level 5 EconomicsExerciseForm 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?
6Efficient and Competitive Markets Efficient Market for a commodityPrice= 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 Marketis efficient, without government interventionthere are no "other parties"; only consumers, producersImperfectly Competitive Marketwithout government help, is not efficient
7Monopoly market with a single seller – a price-maker absence of competitors gives monopoly firms market powerthe most imperfect form of competitionNZ examples: NZ Bus, Auckland Airport (AIA), Vectorcompetitive forces arise from substitutesnot all substitutes are obvious; eg home renovation may be a substitute for overseas holidayslabour monopolies: unions and societiesNatural Monopolywhere large economies of scale exist Mankiw fig 1technical efficiencies maximised if just one firm
8Revenue curves for perfect competition and monopoly for perfect competition marginal revenue is constant because S&R, S fig 6.2 (reminder)each firm is too small to influence the market supply curvehence the perfectly competitive firm cannot, on its own, influence the equilibrium market pricea monopolist's marginal revenue curve is downward sloping S&R, S fig 6.3a monopolist's output is also the market's output an increase in a monopolist's supply reduces the market priceImpact on price: competition and monopoly compared.
9Equilibrium of the Firm; Imperfect Competition applying the MC=MR rule to establish QeProfit () equals S&R, S fig total revenue (TR) minus total cost (TC)firms maximise profit when S&R, S fig marginal revenue (MR) equals marginal cost (MC)under imperfect competition, MR < price AR and MR slope down to the rightfirm's equilibrium, Imperfect Competitionabove-normal profits apply and persist S&R, S fig 7.12a
10Imperfect Competition Level 5 EconomicsFig 7.12afig 4 MankiwImperfect competition esp. monopoly.= price for a given Q(new fig 7.12a)
12Monopolistic Competition S&R, S end of ch.7 industry includes small firmscommonly includes larger firms as welleg restaurants and fast food (McDonalds)product differentiation / variation S&R fig 7.18, S 7.15eg Nike, Levis etcmarket leaders through successful brandingmarketing strategy designed to raise demand for brand and thereby to avoid price-cuttingsuccessful brand variant enjoys less elastic demanddifferentiation can be achieved also by levels of personal service, reputation etc.most well-known firms are monopolistic competitors
13Oligopoly / Duopoly S&R, S end of ch.7 few sellers / two sellers [large size firms]individual firms' supply each affect priceexamples.high barriers to market entry lead to oligopolyoligopolist firms compete for market shareeach rival firm happy to supply more (as economies of scale are common), but not happy for an increase in industry supply to force prices downprice competition [price wars, extreme case]works only in short-term as rivals soon respondbanking, supermarkets, newspapers, energy production and retailing
14Holding Companies & Mergers common ownership through holding companies reduces competitioneg The Warehouse Group; other examples?mergers have to be approved in NZ by the Commerce CommissionCartel: a colluding oligopolyMonopsony:single buyerFonterra (dairy), Zespri (kiwifruit) in NZglobally, these are Monopolistic Competitors
15Natural Monopolywhen a single firm can supply the whole market while experiencing decreasing costs S&R fig 7.15 p.136, S fig 7.18 p (eg Vector)especially where large networks existcompetition would force each firm to produce at an above-optimal cost (ie on the left side of the LAC curve)monopoly is not always badnatural monopolies are usually publicly owned or subject to price regulation to improve their economic efficiencyhigh cost industries with social benefits will often only be provided by a monopolyto operate efficiently, a subsidy may be needed fig 8.2, 8.1fig 7.14, 7.17 for price regulation
16Contrasting effects of Perfect and Imperfect Competition Market Concentration Ratiosmany industries fall between oligopoly and monopolistic competition, with market leadersmonopoly = 1; perfect competition = 0Evaluation of differences S&R, S Table 8.1imperfect competitioncan be made more efficient through policy interventioncompetition creates marketing industrydynamic competition – rivalry – creates changeIssue to think aboutdo Google and Facebook dominate the Internet?
18Efficient Outcome for Society if Price (ie Average Revenue) = Marginal Costprice 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'otherwise , efficiency gains can be realised:if price > marginal cost, there will be increased net benefits if more resources are allocated to that goodif price < marginal cost, there will be increased net benefits if fewer resources are allocated to that good and more resources are allocated to other goodsa market is efficient if a change in the quantity produced cannot lead to efficiency gainsback
19Net Benefits Consumer (household) point of view backConsumer (household) point of viewhappiness – unhappiness = individual welfareProducer (firm) point of viewtotal revenue – total cost = profitSocial point of viewtotal benefit – total cost = societal welfare
20Imperfect Competition Level 5 EconomicsAverage Revenue Curves, firms in industries with different levels of competitionback20% increase in firm’s output; what happens to price?
21Imperfect Competition Average Revenue Curves, Firms in Industries with different levels of competitionLevel 5 EconomicsOligopolyDuopolyMonopolyback
22Imperfect Competition Level 5 EconomicsAverage Revenues of Competitive Firms$5.00market-clearing price (P) per item sold$3.00Monopolistic Competition; Average Revenues for individual brands are like this.$1.00160170180190200210220230240250output (Q) of individual firmback
23from Mankiw, Principles of Economics (4e), p.315 Note KR: "Average Total Cost" here means what we call "Long-Run Average Cost" (LAC)
24Example of a Long-Run Average Cost Curve LAC S&R ch.5 Costs of ProductionLevel 5 EconomicsExample of a Long-Run Average Cost Curve LAC S&R ch.5$eg Dairybackreturneg Superetteeg large Supermarketeg small Supermarketeconomies of scalediseconomies of scale
25Imperfect Competition Level 5 Economicsnatural monopolyAdvertisement from Auckland City Harbour News 25 August 2004back
26Imperfect Competition Level 5 EconomicsDynamic vs. Static Efficiencyback