Transcript J. Block Day--April 9-10--PP--CARTELS-

U.S. Economy
How close to Adam Smith’s World?
No Competition
Pure Free Market
<============================================
Perfect
Competition
Monopolistic
Competition
OLIGOPOLY
Monopoly
Market Characteristics
Oligopoly
Few interdependent sellers:
--the top four firms in the industry make up
70%+ of total sales
• difficult to enter or leave market
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Car makers
Steel industry
Aircraft manufacturing
Oil industry
Oligopoly
Examples
Airlines
Tobacco industry
Beer industry
Soda industry
Home Improvement
Music recording industry
Textbook industry
Wireless communications industry
Aerospace industry
•The most rapidly expanding
market structure in USA over
last 20 years
Why?
Because of Economies of Scale.
Economies
of Scale
Definition: factors that cause a
producer’s average cost per
unit to fall as output rises
Economies of Scale Example
1 car
Cost of
building
factory
(fixed cost)
Cost per
car
produced
$1 Billion
$1,000,000,000
10 cars
$1 Billion
$100,000,000
100 cars
$1 Billion
$10,000,000
1000
cars
$1 Billion
$1,000,000
10,000
cars
100,000
cars
$1 Billion
$1 Billion
$100,000
$10,000
Supply & Demand (Oligopoly)
Individual Firm’s
Demand Curve
Market Demand &
Supply Curves
S
elastic
Market
Price
inelastic
D
Oligopolists face a KINKED demand curve.
--Above market equilibrium, demand is elastic
--Below market equilibrium, demand is inelastic
D
Cartels
Inside the world of OPEC & DeBeers
Price
S
D
Quantity
Cartels
• Cartel
– A group of firms acting in unison
(colluding) to impact the price of their
product
– Illegal in USA based on Anti-Trust Laws
(legal in other countries)
How Cartels Affect Price
•They collude to control/restrict the supply of their
product
•By keeping Supply low, they keep price artificially high
S2
Price
S
D
Quantity
World’s most famous CARTEL
Organization of the Petroleum Exporting Countries (OPEC)
OPEC’S Effect on Oil Market
• Controls 2/3rds of world’s oil reserves
• 45% of current world oil supply
• Can influence price by controlling supply of oil
• uses quotas for each country
Does not “set” oil prices
OPEC Meeting
Supply: Where is the Oil?
OPEC video clips
Diamonds
--what should
determine their value?
• Diamonds were very rare until 1871
• But today, diamonds are less rare than other
gemstones
• So why are they so expensive?
• DeBeers leads a cartel that controls the
world’s diamond market
Film Clip
60 Minutes segment on DeBeers
Graphing Supply & Demand
P2 --------
S
2
S1
D2
S1
P1 --------------D1
P1 --------------D1
• Demand is kept artificially high & inelastic through advertising
• Supply is kept artificially low by DeBeers
• End Result: High prices paid & lower Quantity supplied
Video clip from
“Fair Fight in the Marketplace”
Offender: Archer Daniels Midland Co.
(segment 2) 6 min. 24 sec.