market equilibrium and market demand: imperfect competition dr. mohamed riyazh khan doms – snsce

MarketEquilibrium and Market Demand:

Imperfect Competition

Dr. Mohamed Riyazh Khan

DoMS – SNSCE

Discussion Topics

Market structure characteristicsMonopolistic competition in sellingOligopolies in sellingMonopolies in sellingImplications for consumer and

producer surplus

Market Structure Characteristics

Number of firms and size distribution

Product differentiation

Barriers to entryPicture here tells a

tale of two markets (no. 2 yellow corn vs. farm equipment)

Perfect Competition

Up to now we have been assuming the firm and market reflect the conditions of perfect competition… farmers come close as anybody to meeting these conditions.

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 and university sources)

Merging Demand and Supply

Price

Quantity

D S

PE

QE

Supply CurveSupply Curve

Demand CurveDemand CurveEquilibriumEquilibrium

Firm is a “Price Taker” Under Perfect Competition

Price

Quantity

D S

PE

QE

Price

OMAX

AVC MC

The MarketThe Market The FirmThe Firm

If Demand Increases……

Price

Quantity

D S

PE

QE

Price

AVC MC

The MarketThe Market The FirmThe Firm

10 11

D1

If Demand Decreases……

Price

Quantity

D S

PE

QE

Price

AVC MC

The MarketThe Market The FirmThe Firm

9 10

D2

Firm is a “Price Taker” in the Input Market

Price

Quantity

D S

PE

QE

Price

LMAX

MVP

MIC

Labor MarketLabor Market The FirmThe Firm

Firm is a “Price Taker” in the Input Market

Price

Quantity

D S

PE

QE

Price

LMAX

MVP

MIC

The FirmThe FirmFertilizer MarketFertilizer Market

Imperfect Competition

Many of the markets in which farmers buy inputs and sell their products however do not meet these conditions

This chapter initially focuses on specific types of imperfect competitors in the farm input market, where firms are capable of setting the prices farmers must pay for specific inputs to their production.

Imperfect Competition in Selling

Unlike perfect competitors who face a perfectly elastic demand curve, imperfectcompetitors selling a differentiated productbenefit from a downward sloping demandCurve

Unlike perfect competitors who face a perfectly elastic demand curve, imperfectcompetitors selling a differentiated productbenefit from a downward sloping demandCurve

The marginal revenue in this instance is also downwardsloping, and goes to zero at the point where total revenue peaks.Beyond this point, revenue falls as price falls.

The marginal revenue in this instance is also downwardsloping, and goes to zero at the point where total revenue peaks.Beyond this point, revenue falls as price falls.

Types of Imperfect Competitors in Input Markets

1. Monopolistic competition

2. Oligopoly

3. MonopolyLet’s start here…Let’s start here…

Monopolistic Competitors

Many sellersAbility to differentiate

product by advertising and sales promotions

Profits can exist in the short run, but others bid them away in the long run

Equate MC with MR, but price off the downward sloping demand curve

Short run profits. The firmproduces QSR where MR=MC atE above, but prices its products at PSR by reading off the demand curve which reveals consumer willingness to pay

Short run profits. The firmproduces QSR where MR=MC atE above, but prices its products at PSR by reading off the demand curve which reveals consumer willingness to pay

Short run loss. The firm suffers a loss in the current period following the same strategy of operating at QSR given by MC=MR at point E.

Short run loss. The firm suffers a loss in the current period following the same strategy of operating at QSR given by MC=MR at point E.

At quantity QSR, average total cost (ATCSR) is greater than PSR, which creates the loss depicted above…

At quantity QSR, average total cost (ATCSR) is greater than PSR, which creates the loss depicted above…

In the long run, profits are bid away as more firms enter the market. Or losses will no longerexist as firms leave the market. At QLR, the remaining firms are just breaking even as shownby the lack of gap between the demand curve and ATC curve.

In the long run, profits are bid away as more firms enter the market. Or losses will no longerexist as firms leave the market. At QLR, the remaining firms are just breaking even as shownby the lack of gap between the demand curve and ATC curve.

Top 10 Burger Restaurants

Rank Brand Market Share

Advertising

Mil. Dol.1 McDonald’s 42.8% $571.7

2 Burger King 20.2 407.5

3 Wendy’s 11.5 188.4

4 Hardee’s 5.7 50.5

5 Jack in the Box 3.6 51.2

6 Sonic Drive-ins 3.3 28.1

7 Carl’s Jr. 1.9 34.3

8 Whataburger 1.1 6.7

9 White Castle 1.0 10.1

10 Steak n Shake 0.9 5.7

Total Top 10 92.0% $1,347.4

Total Market $42.3 billion $1,359.7

Imperfect competitionyou face weekly

Imperfect competitionyou face weekly

Oligopolies

A few number of sellersNon-price competition

between oligopolistsMatch price cuts but not

price increases by fellow oligopolists

Like monopolistic competitors, they have some ability to set market prices

Demand curve DD representsthe case when all oligopolistsmove prices together and sharethe market.

Demand curve DD representsthe case when all oligopolistsmove prices together and sharethe market.

Note that shifting MC curves reflecting technological advances will not affect PE and QE. It does affect profit however (MC drops from point 3 to point 4).

Note that shifting MC curves reflecting technological advances will not affect PE and QE. It does affect profit however (MC drops from point 3 to point 4).

Examples of Oligopolists

Farm machinery manufacturersDomestic automobile industryDomestic airline industryPesticide and fertilizer industry

Products sold are largely identified or differentiated by company brand or name.

Products sold are largely identified or differentiated by company brand or name.

Monopolies

Only seller in the marketEntry of other firms is

restricted by patents, etc.They have absolute power

over setting market priceThey produce a unique

productThey can make economic

profits in the long run because they can set price without competition.

Total revenue is equalto the area 0PECQE,which forms the bluebox to the left…

Notice the monopoly,like the previous formsof imperfect competition,produces where MC=MR(point A), but then reads up to the demand curve (point C) when setting price PE.

Total revenue is equalto the area 0PECQE,which forms the bluebox to the left…

Notice the monopoly,like the previous formsof imperfect competition,produces where MC=MR(point A), but then reads up to the demand curve (point C) when setting price PE.

Total variable costs forthe monopolist is equalto area 0NAQE, or theyellow box to the left.

Total variable costs forthe monopolist is equalto area 0NAQE, or theyellow box to the left.

Total fixed costs for themonopolist is equal toarea NMBA, or the greenbox to the left…

Total fixed costs for themonopolist is equal toarea NMBA, or the greenbox to the left…

Total cost is therefore equalto area 0MBQE, or thegreen box plus the yellowbox to the left

Total cost is therefore equalto area 0MBQE, or thegreen box plus the yellowbox to the left

Finally, the economic profitearned by the monopolist isequal to area MPECB, ortotal revenue (blue box) minus total costs (green boxplus yellow box).

Finally, the economic profitearned by the monopolist isequal to area MPECB, ortotal revenue (blue box) minus total costs (green boxplus yellow box).

Let’s compare a monopoly with perfect competition from aneconomic welfare perspective

Consumer surplus underperfect competition isequal to the sum of areas1, 4, 5, 8 and 9, or the blue triangle to the left

Consumer surplus underperfect competition isequal to the sum of areas1, 4, 5, 8 and 9, or the blue triangle to the left

Perfect Competition CasePerfect Competition Case

Producer surplus underperfect competition isequal to the sum of areas2, 3, 6 and 7, or the green triangle to the left

Producer surplus underperfect competition isequal to the sum of areas2, 3, 6 and 7, or the green triangle to the left

Perfect Competition CasePerfect Competition Case

Total economic surplus under perfect competitionis therefore equal to theblue and green triangles to the left, or the sum of areas 1 through 9.

Total economic surplus under perfect competitionis therefore equal to theblue and green triangles to the left, or the sum of areas 1 through 9.

Perfect Competition CasePerfect Competition Case

The monopolist producerswhere MC=MR, but sells ata price PM which consumers are willing to pay.

The monopolist producerswhere MC=MR, but sells ata price PM which consumers are willing to pay.

Monopoly CaseMonopoly Case

Consumers would be economically worse-off by areas 1, 4 and 5 under a monopoly. They are paying a higher price PM for a smaller quantity QM.

Consumers would be economically worse-off by areas 1, 4 and 5 under a monopoly. They are paying a higher price PM for a smaller quantity QM.

Monopoly CaseMonopoly Case

Producer surplus underA monopoly is equal to the sum of areas 3, 4, 5,6 and 7, or the green area to the left.

Thus, producers lose area2 but gain areas 4+5, makingthem economically better-offthan perfect competitors

Producer surplus underA monopoly is equal to the sum of areas 3, 4, 5,6 and 7, or the green area to the left.

Thus, producers lose area2 but gain areas 4+5, makingthem economically better-offthan perfect competitors

Monopoly CaseMonopoly Case

Finally, society as a wholewould be economically worse-off by areas 1+2. Thisis called a dead weight loss.

This reflects the fact thatless of the economy’savailable resources inthis market are being usedto provide products to consumers….

Finally, society as a wholewould be economically worse-off by areas 1+2. Thisis called a dead weight loss.

This reflects the fact thatless of the economy’savailable resources inthis market are being usedto provide products to consumers….

Monopoly CaseMonopoly Case

Summary of imperfect competitors from a selling perspectiveSummary of imperfect competitors from a selling perspective

SummaryUnlike 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.

Know the economic welfare implications of imperfect competition.

Any Query….