Market Equilibrium and Product Price: Imperfect Competition - PowerPoint PPT Presentation

Loading...

PPT – Market Equilibrium and Product Price: Imperfect Competition PowerPoint presentation | free to download - id: 41ba3a-Y2ZiY



Loading


The Adobe Flash plugin is needed to view this content

Get the plugin now

View by Category
About This Presentation
Title:

Market Equilibrium and Product Price: Imperfect Competition

Description:

Market Equilibrium and Product Price: Imperfect Competition Chapter 9 ... – PowerPoint PPT presentation

Number of Views:65
Avg rating:3.0/5.0
Slides: 75
Provided by: AgriLo9
Learn more at: http://agecon2.tamu.edu
Category:

less

Write a Comment
User Comments (0)
Transcript and Presenter's Notes

Title: Market Equilibrium and Product Price: Imperfect Competition


1
Market Equilibrium and Product Price Imperfect
Competition
  • Chapter 9

2
Discussion Topics
  • Market structure characteristics
  • Imperfect competition in selling
  • Imperfect competition in buying
  • Market structure in livestock industry
  • Governmental regulatory measures

3
Market Structure Characteristics
  • Number of firms and size distribution
  • Product differentiation
  • Barriers to entry
  • Picture here tells a tale of two markets (no. 2
    yellow corn vs. farm equipment)

Pages 145-146
4
Market Structure Characteristics
  • Number of firms and size distribution
  • Product differentiation
  • Barriers to entry
  • Existing economic environment (the conditions of
    supply and demand)

Pages 145-146
5
(No Transcript)
6
Perfect Competition
  • Up to now we have been assuming the firm and
    market reflect the conditions of perfect
    competition farmers come close as anybody to
    meeting these conditions.
  • A large number of small firms (2 million farms)
  • A homogeneous product (no. 2 yellow corn)
  • Freely mobile resources (no barriers to entry, no
    patents, for example, as well as no barriers to
    exit)
  • Perfect knowledge of market conditions (outlook
    information from government and university
    sources, for example, The Texas Agricultural
    Extension System or the U.S. Department of
    Agriculture)

7
Merging Demand and Supply
Price
D
S
Chapters 6,8
PE
Chapters 3,4,5
Chapter 8
Quantity
QE
8
Firm is a Price Taker Under Perfect Competition
The Market
The Firm
Price
Price
D
S
AVC
MC
PE
QE
OMAX
Quantity
9
If Demand Increases
The Market
The Firm
D1
Price
Price
D
S
AVC
MC
PE
QE
10 11
Quantity
10
If Demand Decreases
The Market
The Firm
Price
Price
D
S
D2
AVC
MC
PE
QE
9 10
Quantity
11
Firm is a Price Taker in the Input Market
Labor Market
The Firm
Price
Price
D
S
MVP
MIC
PE
QE
LMAX
Quantity
12
Firm is a Price Taker in the Input Market
Labor Market
The Firm
Wage rate
Price
D
S
MVP
MIC
PE
QE
LMAX
Quantity
13
Imperfect Competition in Selling
14
(No Transcript)
15
(No Transcript)
16
Imperfect Competition
  • Many of the markets in which farmers buy inputs
    and sell their products however do not meet these
    conditions

17
Imperfect Competition in Selling
18
(No Transcript)
19
Imperfect competitors selling a differentiated
product have a downward sloping demand curve
since now they can have an influence on price
(e.g., they can differentiate product) (unlike
perfectly competitive firms which have a
perfectly elastic horizontal demand curve
because they and buyers cannot influence price)
Page 150
20
The marginal revenue in this instance also is
downward sloping, and goes to zero at the point
where total revenue peaks
Page 150
21
Types of Imperfect Competitors on the Selling Side
  1. Monopolistic competition
  2. Oligopoly
  3. Monopoly

Lets start here
22
(No Transcript)
23
Monopolistic Competitors
  • Many sellers
  • Ability to differentiate product by advertising
    and sales promotions
  • Profits can exist in the short run, but others
    bid them away in the long run
  • Equate MC with MR, but price off the downward
    sloping demand curve

Page 148-151
24
Short run profits. The firm produces QSR where
MRMC at E above, but prices its products at PSR
by reading off the demand curve which reveals
consumer willingness to pay
Page 150
25
Short run loss. The firm suffers a loss in the
current period following the same strategy of
operating at QSR given by MCMR at point E.
Page 150
26
At quantity QSR, average total cost (ATCSR) is
greater than PSR, which creates the loss depicted
above
Page 150
27
In the long run, profits are bid away as more
firms enter the market. Or losses will no
longer exist as firms leave the market. At QLR,
the remaining firms are just breaking even as
shown by the lack of gap between the demand curve
and ATC curve.
Page 151
28
Top 10 Burger Restaurants
Rank Brand Market Share Advertising Mil. Dol.
1 McDonalds 42.8 571.7
2 Burger King 20.2 407.5
3 Wendys 11.5 188.4
4 Hardees 5.7 50.5
5 Jack in the Box 3.6 51.2
6 Sonic Drive-ins 3.3 28.1
7 Carls Jr. 1.9 34.3
8 Whataburger 1.1 6.7
9 White Castle 1.0 10.1
10 Steak n Shake 0.9 5.7
Total Top 10 92.0 1,347.4
Total Market 42.3 billion 1,359.7
Imperfect competition (monopolistic competition)
you face weekly
29
Oligopolies
  • A few number of sellers, each of which is large
    enough to have influence on market volume and
    price
  • Non-price competition between oligopolists
  • Match price cuts but not price increases by
    fellow oligopolists
  • Like monopolistic competitors, they have some
    ability to set market prices

Pages 152-155
30
(No Transcript)
31
Examples of Oligopolists
  • Farm machinery manufacturers
  • Domestic automobile industry
  • Domestic airline industry
  • Pesticide and fertilizer industry

Products sold are largely identified or
differentiated by company brand or name.
32
Demand curve DD represents the case when all
oligopolists move prices together and share the
market.
Page 154
33
Demand curve dd represents the case when a
single firm changes its price above Pe at point
1. This situation leads to a kinked demand curve
d1D and a discontinuous marginal revenue
curve. Note dd is more elastic than DD
Why? Rival oligopolists will match all price cuts
but not all price increases in the short run
because they want to maintain market share.
Page 154
34
Meeting demand along the lower segment of the
kinked demand curve, the firm is maintaining its
market share. This situation also explains why
there is a tendency for prices to remain at Pe
Page 187
35
Note that shifting MC curves reflecting
technological advances will not affect PE and QE.
(MC drops from point 3 to point 4). This
situation explains why oligopolistic markets are
characterized by infrequent price changes. Firms
usually do not change their price-quantity
combinations in response to small shifts of their
cost curves.
Page 187
36
Monopoly (not the Parker Brothers Game)
  • Only seller in the market
  • Entry of other firms is restricted by patents,
    etc.
  • They have absolute power over setting market
    price
  • They produce a unique product
  • They can make economic profits in the long run
    because they can set price without competition.

Page 155-158
37
(No Transcript)
38
Total revenue is equal to the area 0PECQE, which
forms the blue box to the left Notice the
monopoly, like the previous forms of imperfect
competition, produces where MCMR (point A), but
then reads up to the demand curve (point C)
when setting price PE.
Page 156
39
Total variable costs for the monopolist is
equal to area 0NAQE, or the yellow box to the
left.
Page 156
40
Total fixed costs for the monopolist is equal
to area NMBA, or the green box to the left
Page 156
41
Total cost is therefore equal to area 0MBQE, or
the green box plus the yellow box to the left
Page 156
42
Finally, the economic profit earned by the
monopolist is equal to area MPECB, or total
revenue (blue box) minus total costs (green
box plus yellow box).
Page 156
43
Lets compare a monopoly with perfect
competition from an economic welfare perspective
Page 157
44
Perfect Competition Case
Consumer surplus under perfect competition
is equal to the sum of areas 1, 4, 5, 8 and 9, or
the blue triangle to the left
Page 157
45
Perfect Competition Case
Producer surplus under perfect competition
is equal to the sum of areas 2, 3, 6 and 7, or
the green triangle to the left
Page 157
46
Perfect Competition Case
Total economic surplus under perfect
competition is therefore equal to the blue and
green triangles to the left, or the sum of areas
1 through 9.
Page 157
47
Monopoly Case
Consumer surplus under a monopoly is equal to
the sum of areas 8 and 9, or the new blue
triangle to the left Thus, consumers would be
economically worse off by areas 1, 4 and 5 under
a monopoly. They are paying a higher price PM
and they are receiving a smaller quantity QM.
Page 157
48
Monopoly Case
Producer surplus under a monopoly is equal to
the sum of areas 3, 4, 5, 6 and 7, or the green
area to the left. Thus, producers lose area 2
but gain areas 45, making them economically
better off than perfect competitors
Page 157
49
Monopoly Case
Finally, society as a whole would be economically
worse off by areas 12. This magnitude of loss
is called a dead weight loss. Dead weight loss
may not necessarily be large. This measure
reflects the cost to society due to the existence
of a monopoly in lieu of perfect competition.
Page 157
50
Summary of imperfect competitors from a selling
perspective
Page 157
51
Imperfect Competition in Buying
52
Types of Imperfect Competitors on the Buying Side
  1. Monopsony
  2. Monopsonistic competition
  3. Oligopsony

Lets start here
53
(No Transcript)
54
Monopsonies
  • Single buyer in the market
  • Focus is on the marginal input cost of purchasing
    an addition unit of resources
  • Will equate MRPMIC when making buying decisions
  • As long as MRPgtMIC, the monopsonist makes a profit

Page 158-160
55
Buying Decisions by Perfect Competitors
Marginal revenue product same as marginal value
product under perfect competition.
Page 160
56
Monopsonist now facing upward sloping MIC
since it can influence market price
Page 160
57
Buying Decisions by a Monopsonist
The monopsonist makes decisions along the
marginal revenue product curve. The firm
will equate MRPMIC at point A and decide to buy
quantity QM
Page 161
58
Buying Decisions by a Monopsonist
This situation (imperfect competition in buying)
causes price to fall from PPC to PM which is
referred to as monopsonistic exploitation.
Economists wish to measure this price difference.
Page 161
59
Monopsonistic Competitors
  • Many firms buying resources
  • Ability to differentiate services to producers
  • Differentiated services includes distribution
    convenience and location of facilities,
    willingness to provide credit or technical
    assistance
  • P and Q determined same as monopsonist

Page 161
60
Oligopsonies
  • A few number of buyers of a resource
  • Profit earned will depend on elasticity of supply
    for resource (less elastic than monopsonistic
    competition)
  • Each oligopsonist knows fellow oligopsonists will
    respond to changes in price or quantity it might
    initiate
  • P and Q determined same as monopsonist

Page 161
61
Various segments of the livestock
industry exhibit several forms of imperfect
competition.
Page 162
62
Governmental Regulatory Measures
  • Various approaches have been taken over time to
  • counteract adverse effects of imperfect
    competition
  • in the marketplace. These approaches
    historically include
  • 1. Legislative acts passed by Congress, including
    various
  • antitrust laws
  • 2. Price ceilings
  • 3. Lump-sum tax
  • 4. Minimum prices or floors

Pages 162-166
63
1Legislative Acts
  • Sherman Anti-trust Act 1890
  • Clayton Act 1914
  • Packers and Stockyards Act 1921
  • Capper-Volstead Act 1922
  • Cooperative Marketing Act 1926
  • Robinson-Patman Act 1936
  • Agricultural Marketing Agreement Act 1937

64
2 Implications of a Price Ceiling
Without regulatory interference, the monopolist
will equate MR and MC at point C, produce QM and
charge price PM.
Page 164
65
2 Implications of a Price Ceiling
The monopolists profit is equal to the blue box.
Page 164
66
2 Implications of a Price Ceiling
If the government imposes a price ceiling PMAX,
the demand curve is given by PMAXED. This demand
curve also is the MR curve up to Q1. Beyond Q1,
the segment FG becomes the MR curve.
Page 164
67
2 Implications of a Price Ceiling
The price ceiling has the effect of causing
the monopolist to produce more (Q1gtQM) at a
lower price (PMAXltPM).
Page 164
68
2 Implications of a Price Ceiling
The monopolists profit falls to area IPMAXEH
or the green box above.
Page 164
69
3 Implications of Lump-Sum Tax
The monopolist equates MCMR at point F,
producing QM, and reading up to the demand curve
at point B, will charge PM.
Page 165
70
3 Implications of Lump-Sum Tax
The lump-sum tax on the monopolist raises the
firms average total costs from ATC1 to ATC2.
This tax lowers the monopolists profit from
APMBC to EPMBT, but does not change its level of
output or price.
Page 165
71
3 Implications of Lump-Sum Tax
The lump-sum tax on the monopolist raises the
firms average total costs from ATC1 to ATC2.
This lowers the monopolists profit from APMBC to
EPMBT, but does not change its level of output
or price.
The loss in profit is area AETC or blue box above.
Page 165
72
4 Implications of Minimum Price
Without a minimum price, the monopsonist would
equate MRPMIC and employ QM units of the input
and pay PM.
Page 166
73
4 Implications of Minimum Price
If a minimum price PF is imposed (think of a
minimum wage rate), the monopsonists MIC curve
would be PFDCB. Now, the firm would
actually employ more of the resource.
Page 166
74
Summary
  • Unlike perfect competition, imperfect competitors
    have ability to influence price.
  • Monopolistic competitors try to differentiate
    their product.
  • Monopolists are the only seller in their product
    market. Monopsonists are the only buyer.
  • Oligopolies are a few number of sellers while
    oligopsonies are a few number of buyers.
  • Know the economic welfare implications of
    imperfect competition at least on the selling
    side.
About PowerShow.com