Transcript Market Equilibrium

Market
Equilibrium and
Market Demand:
Imperfect Competition
Dr. Mohamed Riyazh Khan
DoMS – SNSCE
Discussion Topics
Market structure characteristics
Monopolistic competition in selling
Oligopolies in selling
Monopolies in selling
Implications for consumer and
producer surplus
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)
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)
Merging Demand and Supply
Price
D
S
Supply Curve
PE
Demand Curve
Equilibrium
QE
Quantity
Firm is a “Price Taker” Under
Perfect Competition
Price
The Market
D
S
The Firm
Price
AVC
MC
PE
QE
OMAX
Quantity
If Demand Increases……
The Market
Price
D
The Firm
D1
S
Price
AVC
MC
PE
QE
10 11
Quantity
If Demand Decreases……
The Market
Price
D2
D
The Firm
S
Price
AVC
MC
PE
QE
9 10
Quantity
Firm is a “Price Taker” in the
Input Market
Price
Labor Market
D
S
Price
The Firm
MVP
MIC
PE
QE
LMAX
Quantity
Firm is a “Price Taker” in the
Input Market
Price
Fertilizer Market
D
S
Price
The Firm
MVP
PE
MIC
QE
LMAX
Quantity
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.
Imperfect Competition
in Selling
Unlike perfect competitors who face a
perfectly elastic demand curve, imperfect
competitors selling a differentiated product
benefit from a downward sloping demand
Curve
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.
Types of Imperfect Competitors
in Input Markets
1. Monopolistic competition
2. Oligopoly
3. Monopoly
Let’s start here…
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
Short run profits. The firm
produces QSR where MR=MC at
E above, but prices its products at
PSR by reading off the demand
curve which reveals consumer
willingness to pay
Short run loss. The firm suffers a
loss in the current period
following the same strategy of
operating at QSR given by
MC=MR at point E.
At quantity QSR, average total
cost (ATCSR) is greater than
PSR, which creates the loss
depicted above…
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.
Top 10 Burger Restaurants
Rank
Brand
Market Share
Advertising
Mil. Dol.
1
McDonald’s
42.8%
$571.7
2
Burger King
20.2
407.5
3
Wendy’s
11.5
188.4
4
Hardee’s
5.7
50.5
5
Jack in the Box
3.6
51.2
6
Sonic Drive-ins
3.3
28.1
7
Carl’s 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
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
Demand curve DD represents
the case when all oligopolists
move prices together and share
the market.
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).
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.
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.
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 MC=MR
(point A), but then reads
up to the demand curve
(point C) when setting
price PE.
Total variable costs for
the monopolist is equal
to area 0NAQE, or the
yellow box to the left.
Total fixed costs for the
monopolist is equal to
area NMBA, or the green
box to the left…
Total cost is therefore equal
to area 0MBQE, or the
green box plus the yellow
box to the left
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).
Let’s compare a monopoly with
perfect competition from an
economic welfare perspective
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
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
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.
Monopoly Case
The monopolist producers
where MC=MR, but sells at
a price PM which consumers
are willing to pay.
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.
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 4+5, making
them economically better-off
than perfect competitors
Monopoly Case
Finally, society as a whole
would be economically
worse-off by areas 1+2. This
is called a dead weight loss.
This reflects the fact that
less of the economy’s
available resources in
this market are being used
to provide products to
consumers….
Summary of imperfect competitors from a selling perspective
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.
Any Query….