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Chapter 7
line with quantity demanded. As a good becomes relatively more scarce, price will go up. How does this impact firms and consumers?
Markets can be characterized by how prices for goods and services are determined
Oligopoly
Monopoly
Factors
The number and size distribution of
Factors
The extent of barriers to entry
Amount of information available
Factor #1: The number and size distribution of buyers and sellers
annual income
any ones output, compared to total output, is imperceptible. What one farmer does has no influence on what any other farmer does.
consumers. Marketplace has many consumers and the vast majority consume small amounts.
Product Differentiation
A competitive market is
Product Differentiation
Homogeneous or undifferentiated
products cannot be distinguished from one another. E.g. No. 2 yellow corn
Product Differentiation
If you feed livestock and have
two different corn sellers you can buy from, how do you determine which to buy from?
Product Differentiation
Grain elevator Grain elevator
Product Differentiation
What determines decision? Price!
Identical
Barriers to Entry
Barriers are things that prevent
Barriers to Entry
Economics of scale Absolute unit cost
Barriers to Entry
Government policy
Patents Commodity
firms would have same access to new knowledge and information about market prices, quantities, and quality.
Quantity
Pm
MR = D = P
Quantity
The optimal level of output for a competitive firm is determined where Marginal Revenue (MR) is equal to Marginal Cost (MC).
Quantity
Quantity
MC
Quantity
P*
MR = D
Q*
Quantity
Average Total Cost (ATC) can be added to the graph to demonstrate the firms profit potential.
specific good. The difference between ATC and products price equals the profit per unit of product.
Quantity
Quantity
Quantity
$ P* MR = D =P Quantity
$ P*
MC
MR = D =P
Q*
Quantity
$
P*
MC
ATC MR = D =P Quantity
MC ATC
P*
MR = D =P Q* Quantity
$
P*
MC
ATC Profit MR = D =P
Q*
Quantity
Profit
Price - ATC = Profit per unit of
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.
$ or Price
Pe D Qe Quantity
$ or Price S S
Pe D
Qe Quantity
Profit
With the increase in Supply, price
will be driven down. With the lower price, profits will be driven out.
Quantity
$ P*
MR = D =P
Quantity
MC
P*
MR = D =P
Quantity
MC ATC MR = D =P
P*
Quantity
MC ATC MR = D =P
P*
Q*
Quantity
MC ATC Loss MR = D =P
P*
Q*
Quantity
$ or Price S
Pe D
Qe Quantity
$ or Price
S S
Pe
D
Qe
Quantity
Profit
With the decrease in Supply, price
will be driven up. With the higher price, the losses will be driven out.
What are the factors that generate the market price that firms use to make their production decisions?
The interaction of the Market Supply and Market Demand curves will determine the price consumers will pay and producers will receive.
$ or Price
Quantity
$ or Price
D Quantity
$ or Price
S
D Quantity
$ or Price
S
Pe D
Q
Quantity
No product
differentiation
An Increase in Supply
An Increase in Supply
Note the supply curve shifts to the right.
supplied.
An Increase in Supply
A decrease in supply would be represented
$ or Price
Quantity
$ or Price
D
Quantity
$ or Price S
D
Quantity
$ or Price S
D
Q Quantity
$ or Price S
S1 P
D
Q Quantity
$ or Price S
S1 P P1
D
Q Q1 Quantity
Supply Shifters
Input Costs Prices of Related Goods Technology Weather Number of Sellers Taxes Expectations
An Increase in Demand
$ or Price
Quantity
$ or Price
D Quantity
$ or Price
D Quantity
$ or Price
D Q Quantity
$ or Price
D1
D Q Quantity
$ or Price
S
P1 P
D1
D Q Q1 Quantity
An Increase in Demand
Note Demand Curve shifts right Increases price Increases quantity demanded
A Decrease in Demand
Demand Curve would shift left Decreases price Decreases quantity demanded
Demand Shifters
Income Population Tastes and Preferences
Imperfect competition exists whenever a firm has some control over the price it charges for its product.
Forms of Competition
Imperfect Competition
Monopolistic Competition Perfect Competition
Monopoly
Oligopoly
Monopolistic Competition
Many sellers in market
Differentiated products
Monopolistic Competition
Non-price competition usually
occurs
10 Quantity
D 1 5 10 Quantity
Monopolistically Competitive SR
$
22 18 14 10 6 2 1 5 10
Quantity
Monopolistically Competitive SR
$
22 18 14 10 6 2 1 5
10
Quantity
Monopolistically Competitive SR
$
22 18 14 10 6 2 1 5
MR
10
Quantity
Monopolistically Competitive SR
$
22 18 14 10 6 2 1 5
MC
MR
10
Quantity
Monopolistically Competitive SR
$
22 18 14 10 6 2 1 5
MC ATC D
MR
10
Quantity
Monopolistically Competitive SR
$
22 18 14 10 6 2 1 5
MC ATC D
MR
10
Quantity
Monopolistically Competitive SR
$
22 18 14 10 6 2 1 5
MC ATC D
MR
10
Quantity
Monopolistically Competitive SR
$
22 18 14 10 6 2 1 5
MC ATC D
MR
10
Quantity
Monopolistically Competitive LR
$
22 18 14 10 6 2
10 Quantity
Monopolistically Competitive LR
$
22 18 14 10 6 2
10 Quantity
Monopolistically Competitive LR
$
22 18 14 10 6 2
D MR
1 5 10 Quantity
Monopolistically Competitive LR
$
22 18 14 10 6 2
MC
D MR
1 5 10 Quantity
Monopolistically Competitive LR
$
22 18 14 10 6 2
MC
ATC
D MR
1 5 10 Quantity
Monopolistically Competitive LR
$
22 18 14 10 6 2
MC
ATC
D
MR
1 5 10 Quantity
Oligopoly
A few large firms
Products standardized or
Oligopoly Industries
Sugar Light bulbs
Gas
Steel
Glass
Oligopoly Industries
Autos Breakfast cereals
Cigarette makers
Soap
Beer
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
CR Example
CR4 = % of market the largest 4
Pure Monopoly
Only one seller in market
Product totally differentiated
Pure Monopoly
Where a perfectly competitive
10Quantity
$ D
1 5 10Quantity
Monopoly
$
22 18 14 10 6 2 1 5 10Quantity
Monopoly
$
22 18 14 10 6 2 1 5
D
10Quantity
Monopoly
$
22 18 14 10 6 2 1
MR
5 10Quantity
Monopoly
$
22 18 14 10 6 2 1
MC
MR
5 10Quantity
Monopoly
$
22 18 14 10 6 2 1
MC ATC
D
MR
5 10Quantity
Monopoly
$
22 18 14 10 6 2 1
MC ATC
D
MR
5 10Quantity
$20 $18
$16 $14
1 2
3 4
20 36
48 56
>16 >12
>8 >4
$12 $10 $8
5 6 7
60 60 56
>0 >-4
Efficiency Comparisons
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.
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.
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.
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.