A.S 3.1 Understand Marginal analysis and the behaviour of firms

SLO: Describe characteristics of a perfectly competitive firm. Derive the demand curve for a perfectly competitive firm given market demand and supply. Calculate Total, Average and Marginal Revenue for firms.

COMPETITION Price d Quantity Price Quantity d Perfect Competition= No control over price Imperfect Competition = Some control over price

Characteristics of a Perfectly Competitive Market  Large number of buyers and sellers (firms)  Firms have no market power and are price takers Each firm supplies a small amount of the overall market supply Firms cannot influence the market price by altering its output. Only able to sell their good at the price determined in the market  Output is homogenous Product is identical to that produced by other firms  Resources are perfectly mobile  Buyers and firms have perfect knowledge of the market  No Barriers to entry or exit from the market Its easy to set up a firm in this market structure

Perfect Competition Example Market garden Uses simple resources  Land, seeds, water, fertiliser, equipment and labour Price determined by the market What will happen to the price if demand increases? What may happen to the price if the growing conditions have been favourable? NZ examples? -D-Dairy farming -W-Wool growing -F-Fishing

Imperfect Competition There are five different types of market structures that are imperfect  Monopolistic competition  Oligopoly  Duopoly  Monopoly  Monopsony

Monopolistic Competition Has the following characteristics  There are a large number of firms in the industry  Each firm has some control over price because they can differentiate their product  There are weak barriers to entry and exit  Consumer and producer knowledge is imperfect

Monopolistic Competition - Examples Shops and other service providers.  Dairies  Takeaway shops  Hairdressers  Garages

Monopolistic Competition D Price Quantity Monopolistic firms have a small level of control over price or output (due to product differentiation) Therefore they face a downwards sloping demand curve

Oligopoly Has the following characteristics  Few number of large sellers, that dominate the market  Sells similar but differentiated products.  Price is usually similar across the industry  Firms have some control over price  Firms prefer to use non-price competition to provide a competitive advantage  Strong barriers to entry by new firms  Often accused of collusion, as existing firms look as though they act together in their pricing decisions.

Oligopoly: Example Petrol retailing companies  Few large competitors BP SHELL Caltex Mobil  Smaller players Challenge Gull Sell a homogeneous product. These firms differentiate their product with powerful branding using heavy advertising logos sponsorship and other promotions Other Examples New car market -Ford, Mitsubishi, Toyota, Honda Fast Food market - McDonalds, KFC, Burger King Retail banking market - BNZ, ANZ, Kiwibank, Westpac

Kinked Demand Curve p q q1 q2 q3 If producer reduces price (from P2 to P3) the competitors are likely to follow. The result is a smaller % increase in sales from q2 to q3. (inelastic demand). If producer increases price (P2 to P1) the competitors are unlikely to follow. The result is a larger % fall in sales from q2 to q1 (elastic demand) d P1 P2 P3

The risk of using Price Competition A price war may arise ( firms keep lowering prices to try and gain a greater market share. This may result in a firm or firms being unable to operate and might be forced to leave the market altogether. While the firms that survived, will have to settle for decreased profits (as prices are lower) until the price war is over. Due to this risk, Oligopolists prefer not to use price competition and stick to using non-price competition.

Non-Price Competition Product Differentiation Make the product appear different Product Variation Make the product really different

Product Differentiation

Duopoly Has the following characteristics  Market is dominated by two large producers  Have considerable influence on price  Produce differentiated products, with the use of non-price competition  Strong barriers to entry of new firms

Duopoly KEY Market Firm

Duopoly Examples Mobile firm services  Telecom and Vodaphone (one company owns 2 degrees) Domestic airlines in NZ  Quantas NZ and Air NZ Supermarkets  Foodstuffs ( New World, Pak’ n’ Save)  Woolworths Australia (Woolworths, Foodtown, Countdown) Qantas Airways Limited is the national airline of Australia. The name was originally "QANTAS", an acronym/initialism for "Queensland and Northern Territory Aerial Services". Nicknamed "The Flying Kangaroo", the airline is based in Sydney, with its main hub at Sydney Airport.

Duopoly D Price Quantity Duoplolists have a big influence over price by differentiating their product using non- price competition. They therefore face a downwards sloping demand curve

Monopoly Has the following characteristics  One firm known as a monopolist  One firm supplies the whole market or nearly the whole market- has considerable influence on the price by varying quantity it supplies  Very strong barriers to entry and exit  The product it sells has only one or no close substitutes

Monopoly KEY Market Firm

Monopoly: Examples Tranz Rail Inter-island Ferry Postal delivery service: NZ post

Monopoly D Price Quantity A monopolist has a high degree over the price by restricting the quantity it sells. Therefore it faces a downwards sloping demand curve

Monopsony Is the sole BUYER in a market The market is dominated by one large firm that purchases the whole market supply or nearly the whole market Able to have significant influence on the price by varying the quantity it purchases Example: Fonterra

Fill in the gaps table Perfect imperfect Many, few, two, one Homogenous, differentiated, no close substitues None, weak strong