lesson 11-market structures
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GOALS…
• Understand the four market structures1. Perfectly competitive market2. Monopoly3. Oligopoly4. Monopolistic Competition
• Be aware of the pricing and output decisions of firms operating in each structure
MARKET STRUCTURE …
• BUSINESS ENVIRONMENT in which the firm operates, the characteristics of which influence the PRICING and OUTPUT decisions of the firm.
Market Structure• Characteristics of each model:
– Number and size of firms that make up the industry
– Control over price or output– Freedom of entry and exit from the industry– Nature of the product – degree of homogeneity (similarity)
of the products in the industry (extent to which products can be regarded as substitutes for each other)
– Diagrammatic representation – the shape of the demand curve, etc.
Market Structure• Market structure – identifies how a market
is made up in terms of:– The number of firms in the industry– The nature of the product produced– The degree of monopoly power each firm has– The degree to which the firm can influence price– Profit levels– Firms’ behaviour – pricing strategies, non-price competition, output
levels – The extent of barriers to entry– The impact on efficiency
Market Structure
Characteristics: Look at these everyday products – what type of market structure are the producers of these products operating in?
Remember to think about the nature of the product, entry and exit, behaviour of the firms, number and size of the firms in the industry.
You might even have to ask what the industry is??
Canon SLR CameraBananas
Mercedes CLK Coupe
Vodka
Electric Guitar – Jazz Body
Is a group of buyers and sellers of particular good
or service.
What is a Market?
• A market is any one of a variety of different systems, institutions, procedures, social relations and infrastructures whereby persons trade, and goods and services are exchanged, forming part of the economy. It is an arrangement that allows buyers and sellers to exchange things.
• In mainstream economics, the concept of a market is any structure that allows buyers and sellers to exchange any type of goods, services and information.
• The exchange of goods or services for money is a transaction. Market participants consist of all the buyers and sellers of a good who influence its price.
• There are two roles in markets, buyers and sellers. • The market facilitates trade and enables the
distribution and allocation of resources in a society.
4 Major Market Structures:
• Monopoly• Oligopoly• Monopolistic Competition• Pure or Perfect Competition
PERFECT VS IMPERFECT MARKETS
1. Perfectly
Competitive Market
1. Monopoly2. Oligopoly3. Monopolistic
Competition
PERFECT COMPETITION
IMPERFECT COMPETITION
LINE OF COMPETITION
Zero Competit
ion
More competition
Monopoly
Oligopoly
Monopolistically
competitive Market
Perfect Competitive Market
KINDS
OF
COMPETITION
Competition• Is a process of seeking or struggling for a
common thing or position.• Example: “Mcdo vs. Jollibee”, Coke vs. Pepsi,
etc.• There are two kinds of Competition: Healthy
and Unhealthy.• It will be determined by the process, tactics or
strategies used in achieving the goal or objective.
Competition in Business
Advantages - It leads to the improvement of the product
for sale. - Competition keeps price low. - The presence of other firms may lead to an
introduction of new products and services.
Unhealthy Competition
• When positive, legal and clean procedures, ways or strategies are used in attaining a goal where this would lead to the total development of all the aspects of an individual.
Healthy Competition
• Using dirty tactics, illegal means and negative processes are used to win like corrupting other people, resorting to violence, etc.
• This can lead to destruction and mayhem.
Perfect Competition• This is an ideal market structure because it
possesses the many conditions or assumptions that should be seen in a perfect competitive market like the following:
- Many buyers and sellers - Selling of similar/ homogeneous products - Full knowledge among buyers and sellers
about the market conditions - Mobility among the factors of production - Freedom for the producers to enter or leave the
country
Imperfect Competition• It is easier to find pure competition that perfect
competition in our economy because it is very hard to follow all the conditions that have been explained above. But if we are not too strict in applying the conditions, we may find pure competition in rice industry.
• If the conditions are not followed our economy could be considered as IMPERFECT COMPETITIVE.
• Its is divided in three parts: monopoly, oligopoly and monopolistic competition
MONOPOLY
• “The Absence of Competition”• This is the production of a certain or service like no
other and without any product competing against it.
• There is no competitions so the producer may dictate the prices but maybe controlled by the govt. and set up large factories/plants.
• No product can compete with their product or service since there is no close substitute.
MONOPOLISTIC COMPETITION
1. There are many buyers and sellers2. Each firm produces and sells a slightly
differentiated product3. There is easy entry and exit
Oligopoly
• “Competition Among the Few”• Few join this competition• They can connive and conspire so that they
can dictate the price and control the market so that they can raise the profits in industry.
• Oligopolists can produce identical or differentiated products.
Monopolistic Competition
• Includes many sellers and buyers but he products being sold and bought are similar.
• Differentiated products are products that differ somewhat in real qualities brought about by fashion, color, style, brand names, patents and others.
FEATURES…DESCRIPTIONS…
ATTRIBUTES…TRAITS…
MANY BUYERS & SELLERS…
Many buyers
Many sellers
HOMOGENEOUS GOOD
FARMERS PRODUCE SIMILAR APPLES, LEMONS AND BEEF
MEATS
SELLERS & BUYERS ARE WELL INFORMED
ABOUT PRICES…SOURCES OF SUPPLY & QUALITY
EASE OF ENTRY & EXIT OF FIRMS
NEW BUSINESS CAN BE SET UP AT ANYTIME …no barrier or hindrance to
enter into the industry as long as one has the ability and the capacity.
At the same time, NO LOVE LOST FOR BUSINESS WHICH DECIDES TO EXIT
OR LEAVE …
SO…
• If there are many sellers & there are many buyers…there is competition among sellers & no one seller or buyer can influence the price of the good
• The COMPETITIVE firms are PRICE TAKERS
OutputTotal Revenue
Total Cost PROFIT
0
1
2
3
4
5
6
7
8
0
6
12
18
24
30
36
42
48
3
5
8
12
17
23
30
38
47
- 3
1
4
6
7
7
6
4
1
Marginal Revenue
Marginal Cost
-
6
6
6
6
6
6
6
6
-
2
3
4
5
6
7
8
9
PRICE = 6 (Dictated by the market & OUTPUT = 5
PROFIT MAXIMIZING OUTPUT = 5 GIVEN THE MARKET DICTATED PRICE OF 6!
Using graphS…
MC
MR
PROFIT IS MAX
5 QUANTITY
REVENUE, COST PRICE
MR = PRICE6
SHOULD YOU OPEN FOR LUNCH OR
SHOULD YOU OPEN FOR DINNER ONLY???
LUNCH…TO OPEN OR NOT
HAVE YOU WALKED INTO A RESTAURANT FOR LUNCH AND FOUND
IT ALMOST EMPTY?
WHAT WOULD HELP YOU DECIDE?
LUNCH…TO OPEN OR NOT• Keep in mind the distinction between fixed ( rent, kitchen equipment, tables, etc) and variable costs (food & wages)
• Variable costs matter/are relevant rather than the fixed costs
LUNCH…TO OPEN OR NOT• IF THE REVENUE FROM FEW LUNCHTIME CUSTOMERS ARE ENOUGH TO COVER THE VARIABLE COST THEN IT SHOULD OPEN
Dealing with losses
• TR > TVC, then the firm should keep producing
• TR < TVC, then the firm should shut down (temporarily closed)
• TR = TVC, the firm should be indifferent between shutting down and producing
ONE SELLER
UNIQUE PRODUCT
MERALCO =ELECTRICITY
UNIQUE PRODUCT
MAYNILAD =WATER
Economies of scale
INTEL can produceCENTRAL MICRO-
PROCESSORS at the lowest unit cost
Exclusive ownership of a resource
DE BEERS controlsThe market for
DIAMOND
Legal barriers = patents & licenses
PharmaceuticalCompanies are
Given patents to Produce drugs
IBM, KODAK, XEROX, POLAROID
GE, DU PONT
ONE SELLER HAS THE MARKET POWER TO
INFLUENCE THE PRICE
Using graphS…PRICE & OUTPUT DECISIONS OF A MONOPOLIST
MC
MR
PROFIT IS MAX
Q* QUANTITY
REVENUE, COST PRICE
MONOPOLY PRICE
P*
D
MONOPOLY
1. There is only one seller2. The single seller sells a product for which
there are no close substitutes3. There are extremely high barriers to entry
– Legal barriers– Economies of scale (low unit cost)– Exclusive ownership of necessary resource
FEW LARGE SELLERS
SELL HOMOGENEOUS OR DIFFERENTIATED GOOD
CONTROL OVER PRICE BUT MUTUAL INTERDEPENDENCE
• Few oligopolistic firms are price maker
• Consider how its rival will react to any change in price, output, quality or advertising
• Characterized by strategic behavior (self-interest) and mutual interdependence (compete or collude)
LEGAL BARRIERS TO ENTRY
OLIGOPOLY
1. There are few sellers and many buyers2. Firms produce and sell either homogeneous
or differentiated products3. Some control over the price but mutual
interdependence4. There are significant barriers to entry such
as patent rights, legal barriers etc
It is the combination of monopoly and competitive markets but monopolistically competitive industries
Are more competitive than monopolistic.
RELATIVELY LARGE NUMBER OF SELLERS AND BUYERS
• Small market shares• No collusion (agreement, conspiracy
among the firms)• Independent actions about price &
quantity
SELLS DIFFERENTIATED PRODUCTS (Real or imagined)
• Product attributes• Service• Location• Brand names & packaging• Some control over price
PROMOTED BY HEAVY ADVERTISING
DIFFERENT…in terms of product attributes
• Product attributes – functions, materials, design & workmanship
How different are the two?
Hp desktop Mac desktop
Storage capacity, speed, Graphic displays, included Software & compatibility
BAGS…ANYONE??
PRADA VS. VUITTON
I CAN SERVE U BETTER!
THE NEARNESS OF YOU…
SUPERMARKET VS. TINDAHAN NI ALING NENA
BRAND NAMES & PACKAGING
BECAUSE THEY ARE DIFFERENT
• Monopolistically competitive firms have some control over price
• Consumers buy product which they prefer and can afford
• But control over price is limited because of many substitutes
EASY ENTRY AND EXIT
Because competitors are small firms, Economies of scale are few andCapital requirements are low.
WHY advertise???
The goal of product Differentiation and advertising is
NONPRICE COMPETITION.To make price less of a factorIn consumer purchases and Make product differences a
Greater factor
NUMBER OF FIRMS
MONOPOLY
Water
Cable
OLIGOPOLY
Fuel
Tennis Ball
MONOPOLISTIC COMPETITION
Novels
Movies
PERFECT COMPETITION
Agricultural product
Milk
One firm
Few firms
Many firms
Identical Product
Differentiated Product
Type of Product
The Market StructuresCharacteristics Monopoly Oligopoly
Monopolistic Competition
Perfect/Pure Competiti
on
Number of Sellers Single Firm
A few DominantFirms Large Very large
Type of Product
Unique/ No close Substitute
Homogeneous/Differentiat
ed Differentiated
Homogeneous/Standardize
d
Barriers to entry CloseLimited
Entry Fairly EasyOpen/ Easy Entry
Control overthe Price Price Makers
Controlled but not
completely Certain degree
of influence Price Takers
Non-Price Competition
No non-priceCompetition
Extensive for differentiat
edProducts Extensive
No non-price Competition
Examples:
THIS IS THE END
OF MICROECONOMICS
!
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