Transcript unit 4 chapter 12

Hallelujah! This is
the last PowerPoint
presentation.
Oligopoly and
Monopolistic
competitions.
Oligopoly Characteristics
•
•
•
•
•
Few Sellers / Many Buyers
Differentiated products
Price Leadership
High barriers to entry
Non-price competition
The Automobile Industry is a
good example of an Oligopoly
• Few Sellers / Many Buyers---There are many
models of automobiles, but they are produced
by approximately 12 different manufacturers.
• Differentiated Products---A car is a car. It is
designed to get you from point A to point B.
Yet, automobiles are differentiated in how good
you look or how fast you can move between the
two points.
The Automobile Industry is a
good example of an Oligopoly
• Price Leadership---When a leader in the industry lowers
prices, competitors tend to follow. For example: Chrysler
lowered the price of their Jeep Cherokee by offering a low
interest rate. The other manufaturers of utility vehicles
followed by lowering their prices as well (either by
offering cash rebates, free extended warranties, or low
interest rates). Price Leadership also creates cooperation
among rival firms. For example: Ford and General
Motors cooperated with Chrysler to create and test the first
minivans. This helps reduce the total costs for each
firm and yet receive the same results in the end.
The Automobile Industry is a
good example of an Oligopoly
• High barriers to entry---The automobile
industry is a very cost intensive industry.
This in itself is a barrier to entry. Other
barriers may include a distribution network
or limited suppliers of vital compoents.
Government regulations are also a major
barrier for the auto industry.
The Automobile Industry is a
good example of an Oligopoly
• Non-price competition---Automobile dealers
compete against each other, not only with
price, but with warranties, options, reputation,
brand names, and advertisements. Who is to
say that a Ford truck is any better than a
Chevy truck, yet loyal Ford buyers believe
this is very true and would not purchase a
Chevy truck.
You now have the basics to graphs.
There is only one little differnce for the
graph of an oligopoly.
P
MC
ATC
The
Demand
Curve is
Kinked.
D
0
MR
Q
Marginal Revenue is still half the
demand, therefore, MR is also kinked.
P
MC
ATC
D
0
MR
Q
The demand curve is kinked because
of price leadership
P
MC
ATC
Just
remember
that Oli is
kinky.
D
0
MR
Q
All the rules for the Point of Production and
determining the price are the same as they
were for a monopoly.
P
MC
ATC
Where is the
Point of
Production?
D
0
MR
Q
Point of Production is where MC = MR.
P
MC
ATC
What price
will be
charged?
D
0
MR
Q
Carry the point of production up to
the demand curve and Hang a Left.
P
MC
ATC
D
0
MR
Q
Is this firm maximizing profits,
minimizing losses, or breaking even?
P
MC
ATC
P1
Remember
the rules!
D
0
Q1
MR
Q
This firm is maximizing profits.
Average total
cost is below
demand , at
the point of
production.
P
MC
ATC
P1
D
0
Q1
MR
Q
ATC
MC
What price
will this
oligopoly
choose to
charge?
P
25
20
15
10
D
5
0 10
20 30 40 50
MR
Q
$25 is correct.
ATC
MC
P
Remember to find
the point of
production, carry that
up to the demand
curve and hang a left.
25
20
15
10
D
5
0 10
20 30 40 50
MR
Q
$25 is correct.
ATC
MC
P
Remember to find
the point of
production, carry that
up to the demand
curve and hang a left.
25
20
15
10
D
5
0 10
20 30 40
50
Q
ATC
MC
P
25
20
Is this firm
maximizing
profits,
minimizing
losses, or
breaking even?
15
10
D
5
0 10
20 30 40
50
Q
Breaking even is correct.
At the point
of production
(MC=MR),
Average total
cost (ATC) is
equal to
Demand (D).
ATC
MC
P
25
20
15
10
D
5
0 10
20 30 40
50
Q
Jumping over to
Monopolistic
competition
Monopolistic Competition
is the last form of competitive
environments.
Characteristics of Monopolistic
Competition
•
•
•
•
•
Many Sellers / Many Buyers
Differentiated Products
Easy entry / Easy exit
Non-Price Competition
Price Setters
Many products that we purchase
on a daily basis fall into the
category of monopolistic
competition.
Blue Jeans is a good example of a
Monopolistic market.
• Many Sellers / Many Buyers---There are
many manufacturers of blue jeans
• Differentiated Products---Jeans are Jeans,
yet consumers preceive jeans as being very
different.
• Easy entry / Easy exit---If a manufacturer
wishes to produce blue jeans or get out of
the blue jean market it is realitively easy.
Blue Jeans is a good example of a
Monopolistic market.
• Non-price competition---Jeans compete
through advertising, and brand names and
loyalty.
• Price setter---The manufacturers of blue
jeans are able to set their prices given the
respective demand schedule.
Graphs for monopolistic competition look like
and work like the graphs for a monopoly.
MC
P
ATC
25
20
15
10
D
5
0 10
20 30 40
50
MR
Q
What
price and
quantity
will this
oligopoly
choose to
charge?
MC
P
The price will
be
approximately
$24 with athe
quantity of
approximately
24.
ATC
25
20
15
10
D
5
0 10
20 30 40
50
MR
Q
MC
P
The price will
be
approximately
$24 with athe
quantity of
approximately
24.
ATC
25
20
15
10
D
5
0 10
20 30 40
50
MR
Q
MC
P
Is the firm
maximizing
profits,
minimizing
losses, or
breaking
even?
ATC
25
20
15
10
D
5
0 10
20 30 40
50
MR
Q
Minimizing Losses
By Joe, I
think you’ve
got it!
Open the
assignment for
unit 4.
After completing the assignment
for unit 4 you need to read the
remaining chapters and complete
the final assignment for unit 5.
This concludes the Principles of
Microeconomics course ECN 202.