Transcript 1. Market Strctures

A.S 3.1
Understand Marginal analysis
and the behaviour of firms

SLO: Describe characteristics of a
perfectly competitive firm.
Derive the demand curve for a perfectly
competitive firm given market demand and
supply.
Calculate Total, Average and Marginal
Revenue for firms.
COMPETITION
Perfect Competition=
No control over price
Imperfect Competition =
Some control over price
Price
d
Price
d
Quantity
Quantity
Characteristics of a Perfectly
Competitive Market

Large number of buyers and sellers (firms)

Firms have no market power and are price takers
 Each firm supplies a small amount of the overall market supply
 Firms cannot influence the market price by altering its output.
 Only able to sell their good at the price determined in the market

Output is homogenous
 Product is identical to that produced by other firms

Resources are perfectly mobile

Buyers and firms have perfect knowledge of the market

No Barriers to entry or exit from the market

Its easy to set up a firm in this market structure
Perfect Competition Example

Market garden

Uses simple resources

Land, seeds, water,
fertiliser, equipment and
labour

Price determined by the
market

What will happen to the price if
demand increases?
NZ examples?

What may happen to the price
if the growing conditions have
been favourable?
-Dairy farming
-Wool growing
-Fishing
Imperfect Competition

There are five different types of market
structures that are imperfect
 Monopolistic
 Oligopoly
 Duopoly
 Monopoly
 Monopsony
competition
Monopolistic Competition

Has the following characteristics
 There
are a large number of firms in the
industry
 Each firm has some control over price
because they can differentiate their product
 There are weak barriers to entry and exit
 Consumer and producer knowledge is
imperfect
Monopolistic Competition Examples

Shops and other service providers.
 Dairies
 Takeaway
shops
 Hairdressers
 Garages
Monopolistic Competition
Monopolistic firms
have a small level of
control over price or
output (due to
product
differentiation)
Price
D
Quantity
Therefore they face
a downwards sloping
demand curve
Oligopoly

Has the following characteristics
 Few
number of large sellers, that dominate the market
 Sells similar but differentiated products.
 Price is usually similar across the industry
 Firms have some control over price
 Firms prefer to use non-price competition to provide a
competitive advantage
 Strong barriers to entry by new firms
 Often accused of collusion, as existing firms look as
though they act together in their pricing decisions.
Oligopoly: Example

Petrol retailing companies
 Few large
 BP
 SHELL
 Caltex
 Mobil
competitors
 Smaller players
 Challenge
 Gull
Other Examples
•New car market
-Ford, Mitsubishi,
Toyota, Honda
•Fast Food market
- McDonalds, KFC,
Burger King
•Retail banking market
- BNZ, ANZ, Kiwibank,
Westpac
Sell a homogeneous product. These firms
differentiate their product with powerful branding
using heavy advertising logos sponsorship and
other promotions
Kinked Demand Curve
d
If producer reduces price (from
P2 to P3) the competitors are
likely to follow. The result is a
smaller % increase in sales
from q2 to q3. (inelastic
demand).
q1 q2 q3
If producer increases price (P2
to P1) the competitors are
unlikely to follow. The result is a
larger % fall in sales from q2 to
q1 (elastic demand)
p
P1
P2
P3
q
The risk of using Price Competition

A price war may arise ( firms keep lowering
prices to try and gain a greater market share.

This may result in a firm or firms being unable to
operate and might be forced to leave the market
altogether. While the firms that survived, will
have to settle for decreased profits (as prices
are lower) until the price war is over.

Due to this risk, Oligopolists prefer not to use
price competition and stick to using non-price
competition.
Non-Price Competition

Product
Differentiation

Product Variation

Make the product
appear different

Make the product
really different
Product Differentiation
Duopoly

Has the following characteristics
 Market
is dominated by two large producers
 Have considerable influence on price
 Produce differentiated products, with the use
of non-price competition
 Strong barriers to entry of new firms
Duopoly
KEY
Market
Firm
Duopoly Examples

•Qantas Airways Limited is the national
Mobile firm services
airline of Australia. The name was
 Telecom and Vodaphone
(one an
company owns
originally "QANTAS",
acronym/initialism for "Queensland and
degrees)
Northern Territory Aerial Services".
Nicknamed "The Flying Kangaroo", the
airline
based in Sydney, with its main
 Domestic airlines
inisNZ
hub at Sydney Airport.
 Quantas

NZ and Air NZ
Supermarkets
 Foodstuffs
( New World, Pak’ n’ Save)
 Woolworths Australia (Woolworths, Foodtown,
Countdown)
2
Duoplolists have a
big influence over
price by
differentiating their
product using nonprice competition.
Duopoly
Price
D
Quantity
They therefore face
a downwards
sloping demand
curve
Monopoly

Has the following characteristics
 One
firm known as a monopolist
 One firm supplies the whole market or nearly
the whole market- has considerable influence
on the price by varying quantity it supplies
 Very strong barriers to entry and exit
 The product it sells has only one or no close
substitutes
Monopoly
KEY
Market
Firm
Monopoly: Examples
Tranz Rail
 Inter-island Ferry
 Postal delivery service: NZ post

Monopoly
A monopolist has a high
degree over the price by
restricting the quantity it
sells.
Price
Therefore it faces a
downwards sloping
demand curve
D
Quantity
Monopsony

Is the sole BUYER in a market

The market is dominated by one large firm that purchases the
whole market supply or nearly the whole market

Able to have significant influence on the price by varying the
quantity it purchases

Example: Fonterra
Fill in the gaps table

Perfect imperfect

Many, few, two, one
Homogenous, differentiated, no close
substitues
 None, weak strong
