Transcript Chapter 9 Powerpoint

Market
Equilibrium and
Market Demand:
Imperfect Competition
Chapter 9
Market Structure Characteristics
We characterize an
industry by
No. of firms and size dist.
Product differentiation
 Unique products?
Barriers to entry
The picture to the right
concerned with two
markets:
 No. 2 yellow corn: many producers and sellers (Perfect
Competition)
 Farm equipment: few manufacturers and sellers
(Oligopoly)
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Pages 145-148
Perfect Competition
We have been assuming the firm and market
reflect conditions of perfect competition
 Not a bad assumption for many agric. subsectors
 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, university
and private sources
 Dramatic reduction in costs of obtaining information and
increase the speed of information acquisition
3
Imperfect Competition
Many markets in which farmers buy
inputs and sell their products however do
not reflect perfect competition conditions
Chapter 9 focuses on specific types of
imperfect competitors in the farm input
market
These firms are capable of setting prices
farmers must pay for specific inputs
4
Imperfect Competition
in Selling
5
Measures of Concentration
Quantitative measures of the degree of
competition in a market
Concentration Ratio (CR)
 % of the total market revenue accounted for
by 2 (CR2), 4 (CR4), 8 (CR8), 20 (CR20), etc.
largest firms in the industry
 Low CR values→ a high degree of competition
 High CR values → an absence of competition
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Page 148-151
Measures of Concentration
Quantitative measures of competition
Herfindahl-Hirschman Index (HHI)
 The square of % market share of each firm
summed over the largest 50 firms or all firms if
there are < 50 firms in the industry
 Perfect competition, HHI is small
 Only 1 firm, HHI is 10,000 = (1002)
 U.S. Justice Department
o HHI < 1,000 competitive markets
o HHI > 1,800 could be considered concentrated
industry worthy of Justice Dept. examination of any
purchases of other firms in the industry
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Page 148-151
Measures of Concentration
All Food Manufac.
Flour Manufac.
Soybean Processing
Breakfast Cereal
Fluid Milk
Cheese Manufac.
Poultry Processing
Snack Food
HHI
102
831
1931
2425
1075
379
738
1989
CR4
14.8
54.5
81.5
80.4
46.0
31.5
45.7
53.2
CR8
22.8
67.7
91.1
91.9
58.1
46.9
57.5
60.7
CR20
37.6
82.9
98.4
99.6
71.7
70.8
76.9
73.2
CR50
50.8
95.5
99.9
100.0
86.8
88.8
91.5
85.8
Soft Drinks
Cigarettes
Carpet/Rug Mills
Pulp Mills
Petrochemical
Aluminum
Farm Equipment
Auto/Light Truck
HHI
1095
----1650
1024
2535
2250
1829
2022
CR4
58.1
97.8
63.6
53.9
79.6
76.7
59.0
73.7
CR8
70.8
99.4
74.5
81.9
93.5
94.6
65.4
91.6
CR20
83.8
100.0
87.5
99.7
99.8
99.9
74.1
99.3
CR50
94.0
----95.9
100.0
100.0
100.0
83.3
99.8
Whether an industry is concentrated depends
on how narrowly it is defined
 In terms of the product it produces
 Extent of the geographic area it serves
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Page 148-151
Consolidation in the U.S. Dairy Industry
9
Page 165
Measures of Concentration
10
Page 148-151
Measures of Concentration
Cooperative CR Values of Total U.S. Milk Marketed
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Measures of Concentration
Area Dec ′97 Dec ′98 Dec ′99 Area Dec ′97 Dec ′98 Dec ′99
Atlanta 38.5
47.8
52.4
Atlanta 81.6
80.3
75.9
Boston 66.2
85.4
88.1
Boston
89.3
83.4
Charlot 64.4
te
Cincinn 66.8
ati
74.7
73.9
Charlot 38.5
te
81.9 Cincinn 90.3
ati
47.8
52.4
87.6
97.4
84.3
79.4
90.4
92.5
Denver 69.3
68.1
66.9
Denver
63.4
63.3
Miami 89.4
96.5
96.3
Miami 45.7
43.7
54.5
14Market
Avg.
74.2
75.6
Dallas
85
79.3
1999 U.S. CR4: 26.8
84
Dallas 87.7
59
69
Percentage of Fluid Milk Marketed by 4 Largest Processor
Dec. 1997- Dec. 1999 by City (Source: GAO, 2001)
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Topics for Discussion
 Monopolistic Competition
 Definition
 Production and Pricing Decisions
 Oligopolies
 Definition/Examples
 Production and Pricing Decisions
 Monopolies
 Definition/Examples
 Production and Pricing Decisions
 Comparison of Market Structures
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Pages 106-107
Imperfect Competition in Selling
At the firm level, unlike perfect
competitors who face a perfectly elastic
(horizontal) demand curve
Imperfect competitors selling a
differentiated product have a downward
sloping demand curve
$ Firm’s demand curve
A
under P.C.
A
14
$
Firm’s demand curve under
imperfect competition
B
Q
B
Q
Price
15
Table 9-1 Imperfect
Quantity Total Rev. Avg. Revenue Marginal Revenue Competition
15
0
0
--------
-----
14
2
28
14
14
13
4
52
13
12
12
6 2
72 20
12
10
11
8
88
11
8
10
10
100
10
6
9
12
108
9
4
8
14
112
8
2
7
16
112
7
0
6
18
108
6
-2
5
20
100
5
-4
4
22
88
4
-6
3
24
72
3
-8
2
26
52
2
-10
1
28
28
1
-12
0
30
0
-----
-14
Firm faces a
downward sloping
demand curve →
MR ≤ AR
Marginal Revenue
(MR) : Change in
revenue from the
sale of the last
unit of output
(ΔTR÷ΔQ)
Average Revenue
(AR): Total
Revenue/Total
output (TR÷Q)
Note: Price =
Average Revenue
Page 149
Imperfect Competition in Selling
TR
MR 
Q
16
Marginal Revenue (MR): Change in
revenue from the sale of the last unit of
output
Page 150
Imperfect Competition in Selling
Maximum Total Revenue
 Marginal revenue in this instance is also
downward sloping
 MR=0 at the point where TR is at a maximum
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Page 150
Types of Imperfect Competitors
in Input Markets
 Monopolistic Competition
 Oligopoly
 Monopoly
Let’s start here…
18
Monopolistic Competitors
Many sellers
 Each firm has relatively small market
share
 Power to set prices somewhat like a
monopoly
 Face competition like perfect
competition
 Collusion is not possible given
number of firms in the industry
No barriers to entry or exit
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Page 148-151
Monopolistic Competitors
Product Differentiation:
Each firm makes a
product that is slightly different from the
products of competing firms
 Close substitutes but not perfect substitutes
 An attempt to ↑ price will normally results in a ↓ in
volume sold
Competition on Quality, Price, and
Marketing
20
 Quality in design, reliability, service provided to
buyer and ease of access to product
 The firm faces a downward sloping demand curve
 Firm must market intensively: promotions,
distribution, packaging, etc.
Page 148-151
Monopolistic Competitors
Product differentiation does not necessarily
mean there are any physical differences
among products
 They might all be the same, but how they are
sold may make all the difference
21
Page 148-151
Monopolistic Competitors
The monopolistic competitor tries to set
his/her product apart from the competition
 Main method is via advertising
 When this is done successfully, the demand curve
becomes more vertical or inelastic
 Buyers are willing to pay more because they believe it is
much better than their other choices
Basis for product differentiation
 Physical differences
 Ambience
 Appeals to vanity
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Convenience
Reputation
Snob appeal
Page 148-151
Monopolistic Competitors
Typical Monopolistic Competitor
Tries to set firm apart from competition
 New Product Development and Innovation
 Advertising
o Create consumer perception of product differentiation
– real or imagined
o Attempt to keep demand as inelastic as possible
Selling costs can be extremely high
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Page 148-151
Monopolistic Competitors
Short run profits can exist but long
run profits are reduced to 0 with
industry entrants
Fast food industry is a good example
 All services basically the same
 Extensive use of marketing to
differentiate products/services across
firms
 Striving to produce more products
and services
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Page 148-151
Monopolistic Competitors
How much of the product does this
firm produce?
Determine output level where
MC = MR (Why does this make sense?)
What price should the firm charge
for this product?
Locate on the downward sloping
demand curve where above quantity
intersects
Associated price on this demand curve
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Page 148-151
Monopolistic Competitors
$/unit
MC
ATC
PSR
Short run profits exist if:
PSR > ATCSR at QSR
Profits
ATCSR
Firm Demand
E
MR
QSR
Q
The firm produces QSR where MR=MC at E
Prices its products at PSR by reading off the demand
curve at quantity QSR
 Represents consumer’s willingness to pay for QSR
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Page 150
Monopolistic Competitors
$/unit
ATC
MC
ATCSR
Loss
PSR
Firm Demand
E
MR
QSR
Q
Short run loss
 At QSR, PSR
27
< ATCSR
Page 150
Monopolistic Competitors
$/unit
MC
ATC
ATCLR = PLR
Firm Demand
E
MR
QLR
Q
In the Long Run (LR)
 Profits are bid away as more firms enter the market
 Losses will no longer exist as firms leave the market
At QLR the remaining firms are just breaking even
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Monopolistic Competitors
How much is the industry dominated or
not dominated by few suppliers
Depends on the geographical scope –
national, regional, global
 An industry can be almost perfectly competitive
on a national scope, but almost a monopoly
locally e.g. local farm supply cooperative
Depends on the existence of barriers to entry
and exit
29
 Industries may appear concentrated but few
barriers exist to prevent entry which implies less
ability to dominate market
Page 148-151
Oligopolies
A few number of sellers
 Each can impact market price and
quantities
Interdependent in their decision making
 A firm will consider how other firms will
react to pricing, promotional and other
actions
 Key component in marketing strategies
and pricing behavior
30
Pages 152-155
Oligopolies
Rival oligopolists will match price cuts but
not price increases in the short run as they
want to capture larger market share
If there are differences in prices they are the
result of successful product differentiation
Non-price competition between oligopolists
used to uniquely identify products
Tend to have stable prices
 Changes in production and other costs not easily
passed on and may have to be absorbed
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Pages 152-155
Oligopolies
Price leadership strategy
 A particular firm dominates the market
 Controls the largest share of the market
 Other industry firms more efficient in operation,
marketing, etc.
 The dominant firm first sets its price to
maximize profit
 Remaining firms set their prices based on the
dominant firms pricing
 The price set by the oligopolist seller is
higher then under perfect competition
 Quantity produced is lower then perfect comp.
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Pages 152-155
Oligopolies
The dominant firm may be efficient
enough to set a lower price
 Eventually drive the other firms out of
the market
33
Pages 152-155
Oligopolies
Examples of Oligopolies
 Auto manufacturers
 2007 CR4 value of 73.7
 Aircraft manufacturing
 2007 CR4 value of 81.3
 Farm machinery and equipment
 John Deere, J.I.Case and New Holland
 80% of 2-wheel drive tractors
 close to 90% of combines sold in the U.S.
 Cattle slaughtering
34
 CR4 value increased from 39 to 67 over the
1985-1995 period
 2007 CR4 value of 59.4
Pages 152-155
Oligopolies
 Demand curve DD
D
 All oligopolists move prices
together and share market
d
A
d
B
D
C
 Original demand curve dd
A single firm changes
its price
Curve DD is more
inelastic
Below point A, other
firms match price cut
This leads to a kinked
demand curve dAD
Leads to a
discontinuous marginal
revenue curve, dBCE
E
Remember oligopolists account for the reaction
of other firms so there is no single demand curve
35
Pages 152-155
Oligopolies
Meeting demand
D
MC
d
A
B
along the lower
segment of the
kinked demand
curve → the firm is
maintaining its
market share
D
C
E
36
Pages 152-155
Oligopolies
D
MC
d
Shifting MC curve
A
PE
B
MC*
D
C
E
to MC* reflecting
technological
advances will not
affect PE and QE
It does impact
profits as MC drops
QE
37
Pages 152-155
Monopolies
 One seller in the market
 Firm and market demand curve are
the same
 Entry of other firms restricted by
38
patents, etc. (i.e., barrier to entry)
 Firm has absolute power over
setting market price
 Produces a unique product
 It can have economic profits in the
long run because it can set price
without competition
Page 155-156
Monopolies
$/unit
 Total revenue = area
MC
ATC
AVC
C
PE
B
M
A
0PECQE
 Monopolist
produces
quantity where
MC=MR (pt A),
QE
 Uses the
demand curve
(pt C) when
setting price PE
N
Demand= AR
TVC
MR
Quantity
0
39
QE
Page 155-156
Monopolies
$/unit
MC
A
N
Demand= AR
TVC
MR
Quantity
0
40
for the monopolist is
equal to area
0NAQE, (green box)
=AVC x QE
= 0N x QE
B
M
AVC
Total variable costs
C
PE
ATC
QE
Page 155-156
Monopolies
$/unit
MC
AVC
C
PE
 Total fixed costs equals
B
M
NMBA (orange box)
=(ATC-AVC) x QE
TFC
N
ATC
A
Demand= AR
MR
Quantity
0
41
QE
Page 155-156
Monopolies
$/unit
MC
0MBQE (green box
+ orange box)
 = area ONAQE
+ area NMBA
B
M
TFC
N
A
Demand= AR
TVC
MR
Quantity
0
42
AVC
 Total cost is area
C
PE
ATC
QE
Page 155-156
Monopolies
$/unit
Economic
Profit
MC
area MPECB
 = Total Revenue (yellow
box) – Total Costs (green
box + orange box)
B
M
TFC
A
N
Demand= AR
TVC
MR
Quantity
0
43
AVC
 Monopoly economic profit =
C
PE
ATC
QE
Page 155-156
Monopolies
$/unit
MC
AVC
C
PE
Economic
M Profit
 Total fixed costs equals
B
NMBA (orange box)
=(ATC-AVC) x QE
TFC
A
N
Demand= AR
TVC
MR
Quantity
0
44
ATC
QE
Page 155-156
Comparison of Structure Results
Lets compare the results we have
obtained from the alternative
market structures
45
Perfect Competition
$/unit
Supply
Consumer surplus = sum of areas
1, 4, 5, 8 and 9 (Pink triangle)
9
PPC
8
5
6
4
Producer surplus = sum of areas
2, 3, 6 and 7 (green triangle)
1
3 2
Total economic surplus = sum of
blue and green triangles = sum
of areas 1 – 9
7
Demand
MR
0
Quantity
QPC
46
Page 157
Monopoly Case
$/unit
Consumer surplus = sum of areas
8 and 9 (Pink triangle)
9
PM
PPC
 Compared to P.C., consumers would
8
5
6
Supply
4
be economically worse-off by areas 1,
4 and 5
Paying a higher price, PM
Purchasing a smaller quantity, QM
1
3 2
7
Demand
MR
0
47
QM
QPC
Quantity
Page 157
Monopoly Case
$/unit
PS = to sum of areas 3, 4, 5, 6
and 7 (green area)
9
PM
PPC
 Compared to P.C. producers lose
8
5
6
Supply
4
area 2 but gain areas 4 + 5
 Producers economically better-off
than perfect competition
1
3 2
7
Demand
MR
0
48
QM
QPC
Quantity
Page 157
Monopoly Case
$/unit
Supply
Purple triangle is total economic surplus
under perfect competition
Orange triangle is total economic surplus
under monopoly
Society as a whole economically worse-off
by areas 1 + 2 (Green triangle)
 Known as the dead weight loss
 Reflects the fact that less resources in
this market are used to provide
products to consumers
PM
PPC
1
2
Demand
MR
0
49
QM
QPC
Quantity
Page 157
Summary of Impacts of Alternative Market
Structures from a Selling Perspective
50
Page 157
Imperfect Competition
From the Buying Perspective
51
Types of Imperfect Competitors
on the Buying Side
 Monopsonistic competition
 Oligopsony
 Monopsony
Let’s start here…
52
Monopsonies
 Single buyer in the input market
 Focus is on the marginal input cost
of purchasing additional amounts
of an input
 If the objective of the buying firm
is to maximize profit, what is the
decision rule as to how much of an
input should be purchased?
53
Page 158-160
Monopsonies
 General Profit maximizing input use rule
for any firm type:
 To maximize profit the firm should
continue to purchase additional units of
an input so long as the extra revenue
generated by the additional input use is
greater than the additional cost
associated with that additional input use
 So long as ∆Revenue > ∆Cost when
purchasing additional units
54
Page 158-160
Monopsonies
 Under perfect competition, the firm views
its input supply curve as a horizontal line
Firm can purchase as much as desired as the
going price
Firm’s purchases do not impact input’s price
Wage
Rate
Supply curve faced
by a P.C. firm
$12.50
L1
55
L1
Labor
Page 158-160
Monopsonies
 Monopsonist must consider the
marginal input cost (MIC) when
purchasing inputs
 MIC: Extra cost associated with
purchasing an additional unit of input
 Monopsonist must pay higher prices
per unit if he/she wants to purchase
greater amounts of the input
→MIC curve is above the input supply
curve
56
Page 158-160
Monopsonies
 Monopsonist is the only input buyer
→Faces an upward sloping input supply
curve
Input purchasing decisions impact input
prices
Supply curve faced
Wage
Rate
by a monopsonist
$15.75
$12.50
L1
57
L2
Labor
Page 158-160
Marginal Input Cost
58
Units of
Variable Input
1
2
3
Price/Unit
($)
3.00
3.50
4.00
Total Input
Cost
3.00
7.00
12.00
Marginal
Input Cost
----4.00
5.00
4
4.50
18.00
6.00
5
6
7
5.00
5.50
6.00
25.00
33.00
42.00
7.00
8.00
9.00
8
9
10
6.50
7.00
7.5
52.00
63.00
75.00
10.00
11.00
12.00
Page 158-160
Marginal Input Cost
Marginal Input Cost
11
10
9
$/Unit
8
7
Input Supply Curve
6
5
4
Data obtained from
previous table
3
2
1
1
59
2
3
4
5
6 7
8
9 10
Quantity/unit of time
Page 158-160
Monopsonies
 Profit maximizing monopsonist
Use variable input to the point where
Marginal Input Cost (MIC) =Marginal
Revenue Product (MRP)
 MRP: Addition to total revenue attributed
to use of one more unit of variable input
 MRP = Marginal Revenue (MR) x MPP
= (∆Revenue/∆Output) x (∆Output/∆Input)
= ∆Revenue/∆Input
= MVP when MR = P
MIC: Extra cost associated with purchasing
an additional unit of input
60
Page 158-160
Monopsonies
 So long as MRP > MIC profits will
increase with increased input use
 If MRP < MIC, profits will ↑ by
reducing the amount of input used
 Why will this occur?
61
Page 158-160
Monopsonies
$
 P.C. in output market
MIC = MVP
 MRP = MVP under P.C.
 MVP=P x MPP
 Profit Max. →MVP = MIC
MIC
Input SupplyMonopsony
CP.C.
Input SupplyP.C.
CM
MRP
QM
QP.C.
With monopsony, MIC > CM
Input Quantity
CM = input cost/unit under monopsony
CP.C. = input cost/unit under P.C. input market
62
Page 158-160
Monopsonies
 Resource use
 Higher Price paid under P.C., CP.C.
 Utilization higher under P.C., QP.C.
 Price difference referred to as
monopsonistic exploitation
(i.e., CP.C. – CM)
$
MIC
Input SupplyM
CP.C.
Input SupplyP.C.
CM
MRP
QM
63
QP.C.
Input Quantity
Page 158-160
Imperfect Competition on Both Sides
Product Selling Input Purchasing
Perspective
Perspective
Perfect
Perfect
Competition
Competition
Monopolistic
Monopsonistic
Competition
Competition
Oligopoly
Oligopsony
Monopoly
Monopsony
Can have any combination of the above for a
particular firm
64
 Lets look at profit maximization under specific cases
Page 160
65
Introduction to Agricultural Economics, 5th ed
Penson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,
Upper Saddle River, NJ 07458. • All Rights Reserved.
Page 161
 Case #1: Monopsonist in input purchasing and
Monopolist seller of product
 Equilibrium: MRP = MIC at Point A
 Pricing off input supply curve gives QMM and CMM
Use MR not output price
$
MIC
Input
SupplyM
A
(PY) due to being a
monopolist (i.e., single
seller of output)
 MRP = MR*MPP
I don’t display the MVP
curve as not relevant for
monopolist
CMM
MVP
MRP
QMM
66
Input Quantity
Page 161
Case #2: Perfect Competition in input purchasing
and Monopoly seller
 Equilibrium is where MRP=Supply at C
 No Marginal InputCost curve → QPCM and PPCM
$
 Input price determined by
input market
 Take input price as given
C
Input SupplyPC
CPCM
MVP
MRP
QPCM
67
Input Quantity
Page 161
Case #3: Monopsony in input purchasing and
Perfectly Competitive seller
Equilibrium: MVP=MIC at Point E
Pricing off supply curve → QMPC and PMPC at point D
$
We use MVP instead of
MRP curve given P.C. seller
MIC
E
Input
SupplyM
CMPC
D
MVP = PY x MPP
QMPC
68
Input Quantity
Page 161
Case #4: Perfect Competition in both input
purchasing and product sales
Equilibrium: MVP=Supply at Point F
→ QPC and PPC
$
We use MVP instead of
MRP curve given P.C. seller
MVP = PY x MPP
Input price determined
by input market
CPC
F
QPC
69
Input SupplyPC
Input Quantity
Page 161
Monopsonistic Competitors
Many firms buying resources
Ability to differentiate services to
producers
Differentiated services includes
distribution convenience and location of
facilities, willingness to provide credit or
technical assistance
P and Q determined same as
monopsonist
70
Page 161
Oligopsonies
A few number of buyers of a resource
Profit earned will depend on elasticity
of supply for resource (less elastic than
monopsonistic competition)
Each oligopsonist knows fellow
oligopsonists will respond to changes in
price or quantity it might initiate
P and Q determined same as
monopsonist
71
Page 161
Governmental Regulation
Various approaches have been used to
counteract adverse effects of imperfect
competition in the marketplace
 Legislative acts passed by Congress, including
the Sherman Antitrust and Clayton Acts
 Price ceilings
 Lump-sum Tax
 Minimum price or floors
72
Page 162
Legislative Acts
Sherman Antitrust Act of 1890
 Prohibited monopoly and other restrictive
business practices
Packers and Stockyards Act of 1921
 Reinforced anit-trust laws regarding
livestock marketing
Capper-Volstead Act of 1922
 Exempted cooperatives from anti-trust laws
Robinson-Patman Act
 Prohibited price discrimination practices
Agricultural Marketing Agreement Act
Established agricultural marketing orders
73
Page 163
Impacts of Price Ceilings
Regulatory agencies such as the Federal
Trade Commission can impact monopoly
effects by instituting a maximum (ceiling)
price
 FTC charged with investigating business
organizations and practices and carrying
out anti-trust provisions
How can we model the impact of price
ceilings?
74
Page 163
Impacts of Price Ceilings
 Without regulatory
$/unit
Implications of a Price Ceiling
MC
ATC
PM
A
B
D
C
MR
0
75
QM
involvement the
monopolist will
Equate MR and MC
(pt C)
Produce QM and
charge price PM
 Total Revenue =
0PMBQM
 Total Cost = 0ADQM
 Earn a profit of
APMBD
Demand
Quantity
Page 165
Impacts of Price Ceilings
$/unit
 With gov’t imposed
Implications of a Price Ceiling
MC
ATC
PM
B
E
PMAX
J
I
Monopolist’s profit falls to area
JPMAXEI (turquoise box)
C
F
Demand
G
0
76
price ceiling, PMAX
 The demand curve
is given by PMAXEH
 MR is PMAXEFG
 Monoopolist
produces more (Q1
> QM) at a lower
price (PMAX < PM)
QM Q1
H
Quantity
Page 165
Impacts of a Lump Sum Tax
A regulatory agencies can impact the
level of monopoly profits by assessing a
lump-sum tax
 May be a license fee or one-time charge
 This is a fixed tax regardless of output level
How can we model the impact of a lump
sum tax?
77
Page 165
Impacts of a Lump Sum Tax
$/unit
Implications of a Lump Sum Tax
MC
 The monopolist equates
MC=MR (pt. C)
 Produces QM
 Charges PM
 Profit of APMBD
ATC*
ATC
PM
E
A
B
Lump-sum tax
T
D
Per Unit Tax
C
MR
0
78
QM
↑ firm’s ATC to ATC*
↓ producer surplus from
APMBD to EPMBT
Does not change output
level or price
Demand
Quantity
Loss in PS surplus is area AETD (pink box)
Page 165
Impacts of a Minimum Price
In a monopsony, the gov’t could regulate
the price of a resource by imposing a
minimum price that must be paid for that
resource
 A good example is the minimum wage laws
How can we model the impact of a
minimum price policy on how much of
the input may be purchased?
79
Page 165
Impacts of a Minimum Price
No minimum price
 Monopsonist determines
F
$
E


Input
Supply
CF
D
CM
MIC
MRP
QM
QF
where MRP=MIC
Employ QM input units
Pays $CM/unit
 Minimum price, CF, imposed
Monopsonist’s MIC curve
would be CFDEB
The firm would use more input,
QM → QF
Input Quantity
Implications of a Minimum Price
80
Page 166
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.
What are the economic welfare implications
of imperfect competition?
81
Chapter 10 focuses on natural
resource use in agriculture
and the impacts on the
environment
82