Transcript The Economic Way of Thinking 10e ©Prentice Hall 2003 Price

The Economic Way of Thinking
10th Edition
by Paul Heyne, Peter Boettke,
and David Prychitko
“Competition and Monopoly”
PowerPoint Slides prepared by
Assistant Professor
Paul Harris
Camden County College
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The Economic Way of Thinking 10e
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Chapter Outline
I.
II.
III.
IV.
V.
Introduction
Who Qualifies as a Monopolist?
Alternatives, Elasticity, and Market Power
Privileges and Restrictions
Price Takers and Price Searchers
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Chapter Outline
VI. Price Takers’ Markets and
“Optimal” Resource allocation
VII. Competition As a Process
VIII.Once Over Lightly
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Introduction
Reality
Sellers set the majority of the prices.
Buyers set most of the rest.
A few are set by negotiations
between buyers and sellers.
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Introduction
Market transactions are an activity.
Scarcity is a logical condition, not a
material one.
Making choices involves rationing
and prioritizing.
In our interactions with others we
engage in competition.
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Who Qualifies as a Monopolist
Monopoly
One seller
Question
Was telephone service a good example
prior to cellular phones?
Answer
No -- If phone service is broadly defined
as “communication services”
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Who Qualifies as a Monopolist
Monopoly
One seller
Question
Was telephone
service a good example
Question…
priorIstothere
cellular
phones?
a substitute
for
Answer
Electricity?
No -- If phone service is broadly defined
as “communication services”
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Who Qualifies as a Monopolist
Question
Is a grocer a monopolist?
Answer
Yes -- If their services are narrowly defined as a
provider to people with no alternative source of
groceries.
The word “monopoly” is extraordinarily
ambiguous.
For everyone or no one is is a sole seller
depending on how we define the commodity
being sold.
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Who Qualifies as a Monopolist
Question
Is a grocer a monopolist?
Answer
Yes -- If their services are narrowly defined as a
Market power is inversely related
provider
to people with no alternative source of
to elasticity of demand.
groceries.
The word “monopoly” is extraordinarily
ambiguous.
For everyone or no one is is a sole seller
depending on how we define the commodity
being sold.
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Alternatives, Elasticity,
and Market Power
Question
What problems result from a single
seller?
Single sellers face no competition.
Buyers have no substitutes.
Can be taken advantage of more easily
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Alternatives, Elasticity,
and Market Power
Price Elasticity of
demand
helps explain
how much control
suppliers
have over price.
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Alternatives, Elasticity,
and Market Power
P
Does not exist
Q
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Alternatives, Elasticity,
and Market Power
P
Less than
perfectly elastic
demand
Q
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Alternatives, Elasticity,
and Market Power
P
Less elastic
demand
Q
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Alternatives, Elasticity,
and Market Power
More substitutes--more elastic the
demand
Market Power
A matter of degree
Inversely related to elasticity of
demand
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Privileges and Restrictions
Monopolies may result from acts of the
state.
Allow some to engage in an activity
but not others
Tax or restrict some sellers but not
others
Grant protection or assistance to some
but not others
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Privileges and Restrictions
Monopoly grants exist to provide:
Public safety
Fair competition
Stability
National security
Efficiency
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Privileges and Restrictions
• Questions
– Who benefits from these restrictions?
– Any losers?
• Monopolist (a possible definition)
– Any individual or organization operating
with the advantage of special privileges
granted by the government
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Privileges and Restrictions
• Question
– What firms would be a monopolist using this
definition?
• Oligopolies
– Few sellers
• Questions
– Few sellers of what?
– How do we define the commodity?
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Privileges and Restrictions
• Question
– What firms would be a monopolist using this
definition?
Question…
• Oligopolies
Are US Auto Makers
– Few sellers
considered oligopolistic?
• Questions
– Few sellers of what?
– How do we define the commodity?
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Price Takers and Price Searchers
Questions
Does U.S. Steel establish the price for its
product?
Does a farmer establish the price for
his/her product?
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Price Takers and Price Searchers
• Question
– What would happen if a farmer tried to
sell his produce above the current
market price of $3.38 3/4?
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Price Takers and Price Searchers
P
3.50
Won’t sell any
Sell all he wants
3.48 3/4
D
Sell all he wants
3.46
Q
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Price Takers and Price Searchers
Question..
Will the market price be
affected if a farmer refuses
to sell his produce?
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Price Takers and Price Searchers
• The farmer is a price taker.
– He cannot affect the price.
– He can sell all he wants at the market
price.
– He will not sell any at a price above
the market price.
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Price Takers and Price Searchers
Normal Seller
Sells more at a lower price
Sells less at a higher price
These firms are price searchers.
They search for the price that is most
advantageous to them.
They have some market power.
Inversely related to elasticity of demand
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Price Takers and Price Searchers
P
Demand curves
faced by price
searchers
Q
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Price Takers Markets and “Optimal”
Resource Allocation
• Questions
– Are monopolists price searchers?
– Do they face competition?
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Price Takers Markets and
“Optimal” Resource Allocation
• Scenario
– Let’s look at the demand and supply
curves for house painters during a
summer.
– This will be used to illustrate the
advantages of the price takers
assumption.
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Price Takers Markets and
“Optimal” Resource Allocation
Remember
Supply curves are marginal cost curves.
Marginal cost curves for any individual
will slope upward to the right.
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Price per Hour
Price Takers Markets and
“Optimal” Resource Allocation
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6
4
2
0 0
S= MC
Sometimes
called the
“optimal
allocation of
resources”
D
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Thousands of Hours
of House Painting
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Price Takers Markets and “Optimal”
Resource Allocation
• Scenario
– Suppose a legislative body raises the
minimum wage to $10/hour.
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Price per Hour
Price Takers Markets and
“Optimal” Resource Allocation
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10
8
6
4
2
0 0
S= MC
Gain from
trade
foregone
D
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Thousands of Hours
of House Painting
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Price Takers Markets and
“Optimal” Resource Allocation
Prices fixed above marginal cost rule out
some mutually advantageous exchange
opportunities.
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Price Takers Markets and
“Optimal” Resource Allocation
• In a price takers’ market:
– No seller can set and keep price above
marginal cost.
• In a price searchers’ market:
– They can do so.
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Competition as a Process
 In economics
competition
means a state of
affairs.
 A competitive
market is said to
exist when…
The Economic Way of Thinking 10e
 There are a large number of
buyers and sellers, and nobody
possesses market power.
 Market participants possess full
and complete information of
alternatives
 Sellers produce a homogenous
product.
 There is costless mobility of
resources.
 The economic actors are price
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takers
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Once Over Lightly
• Monopoly means one seller.
• Narrowly defined every seller is a
monopolist.
• The word monopoly is ambiguous.
• No seller has unlimited power over
buyers.
• Elasticity of demand reflects the
number of substitutes.
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Once Over Lightly
• The more substitutes a product has the
more elastic the demand for a product.
• Some companies are granted special
privileges that restrict their competition.
• Competition makes some sellers price
takers, while others with less
competition are price searchers.
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Next Chapter
10, “Price
Searching”
End of Chapter 9