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Market Equilibrium and Market Demand: Imperfect Competition

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Market Equilibrium and Market Demand: Imperfect Competition Chapter 9 Discussion Topics Market structure characteristics Monopolistic competition in selling ... – PowerPoint PPT presentation

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Title: Market Equilibrium and Market Demand: Imperfect Competition


1
MarketEquilibrium and Market DemandImperfect
Competition
  • Chapter 9

2
Discussion Topics
  • Market structure characteristics
  • Monopolistic competition in selling
  • Oligopolies in selling
  • Monopolies in selling
  • Implications for consumer and producer surplus

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 177-178
4
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
    caused by patents, etc. or barriers to exit)
  • Perfect knowledge of market conditions (quality
    outlook information from government and
    university sources)

5
Merging Demand and Supply
Price
D
S
Chapters 6-7
PE
Chapters 3-5
Chapter 8
Quantity
QE
6
Firm is a Price Taker Under Perfect Competition
The Market
The Firm
Price
Price
D
S
AVC
MC
PE
QE
OMAX
Quantity
7
If Demand Increases
The Market
The Firm
Price
D1
Price
D
S
AVC
MC
PE
QE
10 11
Quantity
8
If Demand Decreases
The Market
The Firm
Price
Price
D
S
D2
AVC
MC
PE
QE
9 10
Quantity
9
Firm is a Price Taker in the Input Market
Labor Market
The Firm
Price
Price
D
S
MVP
MIC
PE
QE
LMAX
Quantity
10
Firm is a Price Taker in the Input Market
The Firm
Fertilizer Market
Price
Price
D
S
MVP
PE
MIC
QE
LMAX
Quantity
11
Imperfect Competition
  • Many of the markets in which farmers buy inputs
    and sell their products however do not meet these
    conditions
  • This chapter initially focuses on specific types
    of imperfect competitors in the farm input
    market, where firms are capable of setting the
    prices farmers must pay for specific inputs to
    their production.

12
Imperfect Competition in Selling
13
Unlike perfect competitors who face a perfectly
elastic demand curve, imperfect competitors
selling a differentiated product benefit from a
downward sloping demand Curve (see Table 9.1 for
both curves)
Page 182
14
See table 11.1 on page 237
The marginal revenue in this instance is also
downward sloping, and goes to zero at the point
where total revenue peaks. Beyond this point,
revenue falls as price falls.
Page 182
15
Types of Imperfect Competitors in Input Markets
  1. Monopolistic competition
  2. Oligopoly
  3. Monopoly

Lets start here
16
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 181-184
17
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 183
18
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 183
19
At quantity QSR, average total cost (ATCSR) is
greater than PSR, which creates the loss depicted
above
Page 183
20
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 184
21
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 you face weekly
Page 185
22
Oligopolies
  • A few number of sellers
  • 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 184-188
23
Demand curve DD represents the case when all
oligopolists move prices together and share the
market.
Page 187
24
Demand curve dd represents the case when a
single firm changes its price above Pe at point
1. This leads to a kinked demand curve d1D and a
discontinuous marginal revenue curve between 2
and 5.
Page 187
25
Demand curve dd represents the case when a
single firm changes its price above Pe at point
1. This leads to a kinked demand curve d1D and a
discontinuous marginal revenue curve.
Why? Rival oligololists will match price cuts but
not price increases in the short run because they
want to capture a larger market share.
Page 187
26
Meeting demand along the lower segment of the
kinked demand curve, the firm is maintaining its
market share.
Page 187
27
Note that shifting MC curves reflecting
technological advances will not affect PE and QE.
It does affect profit however (MC drops from
point 3 to point 4).
Page 187
28
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.
29
Monopolies
  • 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 188-191
30
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 189
31
Total variable costs for the monopolist is
equal to area 0NAQE, or the yellow box to the
left.
Page 189
32
Total fixed costs for the monopolist is equal
to area NMBA, or the green box to the left
Page 189
33
Total cost is therefore equal to area 0MBQE, or
the green box plus the yellow box to the left
Page 189
34
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 189
35
Lets compare a monopoly with perfect
competition from an economic welfare perspective
Page 191
36
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 191
37
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 191
38
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 191
39
Monopoly Case
The monopolist producers where MCMR, but sells
at a price PM which consumers are willing to pay.
Page 191
40
Monopoly Case
Consumers would be economically worse-off by
areas 1, 4 and 5 under a monopoly. They are
paying a higher price PM for a smaller quantity
QM.
Page 191
41
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 191
42
Monopoly Case
Finally, society as a whole would be economically
worse-off by areas 12. This is called a dead
weight loss. This reflects the fact that less of
the economys available resources in this market
are being used to provide products to consumers.
Page 191
43
Summary of imperfect competitors from a selling
perspective
Page 190
44
Imperfect Competition in Buying
45
Types of Imperfect Competitors on the Buying Side
  1. Monopsonistic competition
  2. Oligopsony
  3. Monopsony

Lets start here
46
Monopsonies
  • Single buyer in the market
  • Focus is on the marginal input cost of purchasing
    an addition unit of resources
  • Will equate MVPMIC when making buying decisions
  • As long as MVPgtMIC, the monopsonist makes a profit

Page 192-195
47
Buying Decisions by Perfect Competitors
Marginal revenue product same as marginal value
product under perfect competition.
Page 194
48
Buying Decisions by Perfect Competitors
Review graph on page 161 in Chapter 7 for
more background on the MVPMIC concept
Page 194
49
Buying Decisions by a Monopsonist
Monopsonist makes decesions along the marginal
reveuve product curve, which now differs from
MVP. The firm will equate MRPMIC at point A and
decide to buy quantity QM
Page 194
50
Buying Decisions by a Monopsonist
This causes price to fall from PPC to PM which
is referred to as monopsonistic explotation.
Page 194
51
Case 1 Monopsonist in buying and sole seller
of product. Equilibrium is where MRPMIC at
Point A. Pricing off supply curve gives QMM and
PMM.
Page 195
52
Case 2 Perfect competition in buying but
monopoly in selling. Equilibrium is
where MRPSupply at Point C which gives QPCM and
PPCM.
Page 195
53
Case 3 Perfect competition in selling but
monopsony in buying. Equilibrium is
where MVPMIC at Point E. Pricing off supply
curve gives QMPC and PMPC.
Page 195
54
Case 4 Perfect competition in both selling
and buying. Equilibrium is where MVPSupply at
Point F which gives QPC and PPC.
Page 195
55
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 195
56
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 195
57
Various segments of the livestock
industry Exhibit several forms of imperfect
competition.
Page 196
58
Governmental Regulatory Measures
  • Various approaches have been taken over time to
  • Counteract adverse effects of imperfect
    competition
  • In the marketplace. These include
  • 1.Legislative acts passed by Congress, including
    the
  • Sherman Antitrust Act
  • 2.Price ceilings
  • 3.Lump-sum Tax
  • 4.Minimum price or floors

Page 197
59
1Legislative Acts
  • Sherman Antitrust Act
  • Packers and Stockyards Act
  • Cooperative Marketing Act
  • Robinson-Patman Act
  • Agricultural Marketing Agreement Act

60
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 199
61
2 Implications of a Price Ceiling
The monopolists profit is equal to APMBC or
the blue box to the left.
Page 199
62
2 Implications of a Price Ceiling
If government imposes a price ceiling PMAX,
the demand curve is given by PMAXED. This is
also MR up to Q1. Beyond Q1, FG becomes the MR
curve.
Page 199
63
2 Implications of a Price Ceiling
The price ceiling has the effect of of causing
the monopolist to produce more (Q1gtQM) at a
lower price (PMAXltPM).
Page 199
64
2 Implications of a Price Ceiling
The monopolists profit falls to area IPMAXEH
or green box above.
Page 199
65
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 and charging PM.
Page 200
66
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 producer surplus
from APMBC to EPMBT, but does not change its
level of output or price.
Page 200
67
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 producer surplus
from APMBC to EPMBT, but does not change its
level of output or price.
The loss in producer surplus is area AETC or blue
box above.
Page 200
68
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 200
69
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. Here the firm would
actually employ more of the resource.
Page 200
70
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.

71
Chapter 10 focuses resource use in agriculture
and the environment.
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