Presentation is loading. Please wait.

Presentation is loading. Please wait.

Competition and the Market Chapter 7. The function of Price Price brings quantity supplied in line with quantity demanded. As a good becomes relatively.

Similar presentations


Presentation on theme: "Competition and the Market Chapter 7. The function of Price Price brings quantity supplied in line with quantity demanded. As a good becomes relatively."— Presentation transcript:

1 Competition and the Market Chapter 7

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 Markets can be characterized by how prices for goods and services are determined

4 Major Market Structures Perfect competition Monopolistic competition Oligopoly Monopoly

5 Forms of Market Competition Perfect Competition Monopoly Monopolistic Competition Oligopoly

6 The Competitive Model The process of competition involves a rivalry among firms and is prevalent throughout our economy.

7 The Competitive Model The state of competition is the end result of the competitive process under certain conditions.

8 Factors Affecting the Form of Market Competition an Industry Expresses

9 Factors The number and size distribution of buyers and sellers The degree of product differentiation

10 Factors The extent of barriers to entry Amount of information available

11 Factor #1: The number and size distribution of buyers and sellers

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 Number and Size Distribution Most farms output is so small, any ones output, compared to total output, is imperceptible. What one farmer does has no influence on what any other farmer does.

14 Number and Size Distribution The same can be said for consumers. Marketplace has many consumers and the vast majority consume small amounts.

15 Factor #2: Product Differentiation

16 Product Differentiation A competitive market is characterized by undifferentiated or homogeneous products.

17 Product Differentiation Homogeneous or undifferentiated products cannot be distinguished from one another. E.g. No. 2 yellow corn

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 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 determines decision? Price! Identical product 5000 bu x $.01 less/bu = $50 savings by using elevator A

21 Factor #3: Barriers to Entry

22 Barriers to Entry Barriers are things that prevent other firms from entering the market.

23 Barriers to Entry Economics of scale Absolute unit cost advantages Capital access cost

24 Barriers to Entry Government policy Patents Commodity programs Import controls

25 Factor #4: Perfect Knowledge and Information

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 Profit Maximizing Entrepreneurial Firms For perfect competition to exist, firms must have a singular goal of profit maximization.

28 The Profit Motive and the Results of Competition The competitive firms demand curve

29 $ Quantity The competitive firms demand curve

30 $ MR = D = P Quantity PmPmPmPm The competitive firms demand curve

31 The optimal level of output for a competitive firm is determined where Marginal Revenue (MR) is equal to Marginal Cost (MC).

32 $ Quantity Optimal Output Level

33 $ MR = D Quantity P*P*P*P* Optimal Output Level

34 $ MC MR = D Quantity P*P*P*P* Optimal Output Level

35 $ MC MR = D Quantity Q*Q*Q*Q* P*P*P*P* Optimal Output Level

36 Average Total Cost (ATC) can be added to the graph to demonstrate the firms profit potential.

37 Average Total Cost The per unit cost of producing a specific good. The difference between ATC and products price equals the profit per unit of product.

38 $ Quantity Average Total Cost

39 ATC $ Quantity

40 Price - ATC = Profit per unit of output Note: Price > ATC indicates a profit

41 $ Quantity

42 $ MR = D = P = P Quantity P*P*P*P*

43 $ MC MR = D = P = P Quantity Q* P*P*P*P*

44 $ MC MR = D = P = P Quantity ATC P*P*P*P*

45 $ MC MR = D = P = P Quantity ATC Q*Q*Q*Q* P*P*P*P*

46 Profit $ MC MR = D = P = P Quantity ATC Q*Q*Q*Q* P*P*P*P*

47 Profit Price - ATC = Profit per unit of output Note: Price < ATC indicates a loss

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 $ or Price S D Quantity PePePePe QeQeQeQe

50 S D Quantity PePePePe QeQeQeQe S

51 Profit With the increase in Supply, price will be driven down. With the lower price, profits will be driven out.

52 $ Quantity

53 $ MR = D = P = P Quantity P*P*P*P*

54 $ MC MR = D = P = P Quantity P*P*P*P*

55 $ MC MR = D = P = P Quantity ATC P*P*P*P*

56 $ MC MR = D = P = P Quantity ATC Q*Q*Q*Q* P*P*P*P*

57 $ MC MR = D = P = P Quantity ATC Q*Q*Q*Q* P*P*P*P* Loss

58 $ or Price S D Quantity PePePePe QeQeQeQe

59 S D Quantity PePePePe QeQeQeQe S

60 Profit With the decrease in Supply, price will be driven up. With the higher price, the losses will be driven out.

61 Market Price and Quantity

62 What are the factors that generate the market price that firms use to make their production decisions?

63 The interaction of the Market Supply and Market Demand curves will determine the price consumers will pay and producers will receive.

64 Market Supply and Demand Relationship for a Competitive Market

65 $ or Price Quantity

66 D Quantity

67 S D Quantity

68 S D Quantity PePePePe QeQeQeQe

69 Specific Results of Competition Price takers Optimal output No product differentiation

70 Specific Results of Competition Market equilibrium Technological advancements Efficiency

71 Changes in Supply or Demand

72 An Increase in Supply

73 Note the supply curve shifts to the right. This lowers price and increases quantity supplied.

74 An Increase in Supply A decrease in supply would be represented by a shift of the supply curve to the left.

75 $ or Price Quantity

76 D Quantity

77 S D Quantity

78 S D Quantity P Q

79 S D Quantity P Q S1S1S1S1

80 S D Quantity P Q S1S1S1S1 P1P1P1P1 Q1Q1Q1Q1

81 Supply Shifters Input Costs Prices of Related Goods Technology Weather Number of Sellers Taxes Expectations

82 An Increase in Demand

83 $ or Price Quantity

84 D Quantity

85 S D Quantity

86 S D Quantity P Q

87 S D Quantity P Q D1D1D1D1

88 S D Quantity P Q D1D1D1D1 P1P1P1P1 Q1Q1Q1Q1

89 An Increase in Demand Note Demand Curve shifts right Increases price Increases quantity demanded

90 A Decrease in Demand Demand Curve would shift left Decreases price Decreases quantity demanded

91 Demand Shifters Income Population Tastes and Preferences Prices of Related Goods Expectations

92 Agricultures Competitive Side 2.1 mil farms Homogeneous products Freedom of entry and exit Information is available

93 Agricultures Departure from Competition Soviet grain deal of 1973 Marketing cooperatives High land prices Technology availability

94 Models of Imperfect Competition

95 Imperfect competition exists whenever a firm has some control over the price it charges for its product.

96 Forms of Competition PerfectCompetition Monopoly MonopolisticCompetition Oligopoly Imperfect Competition

97 Monopolistic Competition Many sellers in market Differentiated products Ease of entry or exit Information is readily available

98 Monopolistic Competition Non-price competition usually occurs

99 $ Quantity 1 5 10 Monopolistic Competitor Demand Curve

100 $ Quantity D 1 5 10 Monopolistic Competitor Demand Curve

101 Monopolistically Competitive Firms Price, Quantity, and Profit Short Run

102 $ Quantity 1 5 10 2218141062 Monopolistically Competitive SR

103 $ Quantity D 1 5 10 2218141062 Monopolistically Competitive SR

104 $ Quantity D 1 5 10 2218141062 MR Monopolistically Competitive SR

105 $ Quantity D 1 5 10 2218141062 MR MC Monopolistically Competitive SR

106 $ Quantity D 1 5 10 2218141062 MR MC ATC Monopolistically Competitive SR

107 $ Quantity D 1 5 10 2218141062 MR MC ATC Monopolistically Competitive SR

108 $ Quantity D 1 5 10 2218141062 MR MC ATC Monopolistically Competitive SR

109 $ Quantity D 1 5 10 2218141062 MR MC ATC Monopolistically Competitive SR

110 Monopolistically Competitive Firms Price, Quantity, and Profit Long Run

111 $ Quantity 1 5 10 2218141062 Monopolistically Competitive LR

112 $ Quantity D 1 5 10 2218141062 Monopolistically Competitive LR

113 $ Quantity D 1 5 10 2218141062 MR Monopolistically Competitive LR

114 $ Quantity D 1 5 10 2218141062 MR MC Monopolistically Competitive LR

115 $ Quantity D 1 5 10 2218141062 MR MC ATC Monopolistically Competitive LR

116 $ Quantity D 1 5 10 2218141062 MR MC ATC Monopolistically Competitive LR

117 Oligopoly A few large firms Products standardized or differentiated Difficult entry Knowledge not available to all firms

118 Oligopoly Industries Sugar Light bulbs Gas Steel Glass

119 Oligopoly Industries Autos Breakfast cereals Cigarette makers Soap Beer

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 CR Example CR 4 = % of market the largest 4 firms control Malt beverage industry CR 4 = 90%

122 Pure Monopoly Only one seller in market Product totally differentiated No free entry or exit Imperfect information

123 Pure Monopoly Where a perfectly competitive firm is a price taker, the monopolist is a price searcher.

124 $ Quantity P*P*P*P* 1 5 10 Monopolists Demand Curve

125 $ Quantity P*P*P*P* D 1 5 10 Monopolists Demand Curve

126 Monopoly Price, Quantity, and Revenue Schedules

127 $ Quantity 1 5 10 2218141062 Monopoly

128 $ Quantity D 1 5 10 2218141062 Monopoly

129 $ Quantity D 1 5 10 2218141062 MR Monopoly

130 $ Quantity D 1 5 10 2218141062 MR MC Monopoly

131 $ Quantity D 1 5 10 2218141062 MR MC ATC Monopoly

132 $ Quantity D 1 5 10 2218141062 MR MC ATC Monopoly

133 Monopoly Revenue Schedule

134

135 Efficiency Comparisons

136 The Growth of Firms Internal Growth External Growth

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 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 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 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 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 cant use their market power to enhance prices.


Download ppt "Competition and the Market Chapter 7. The function of Price Price brings quantity supplied in line with quantity demanded. As a good becomes relatively."

Similar presentations


Ads by Google