demand and supply. recap in unit 1, we studied how the free market allocate scares resources. in...
TRANSCRIPT
RecapIn unit 1, we studied how the free market allocate scares
resources.
In unit 2 we will study how scares resources are allocated in different kinds of “free” markets. These markets broadly exist in 4 forms:
- Perfection Competition- Monopoly- Oligopoly - Monopolistic Competitive
DEMAND AND SUPPLY
DEMAND AND SUPPLYThe Market for Roti Prata – Perfect Competition
I want it cheapI can get my prata ANYWHERE
MAKE ME PRATA HAPPY!!!
$2.00/prata ($1.50 profit)
$1.50/ prata ($1.00 profit)
$1.50/ prata ($1.00 profit)$1.50/ prata ($1.00 profit)
Cost of 1 prata is $0.50 (Using best available resource , technology and method)
Profile of The Quintessential Consumer
DEMAND AND SUPPLYThe Market for Roti Prata – Perfect Competition
I want it cheapSo many prata stores
MAKE ME PRATA HAPPY!!!
$2.00/prata ($1.50 profit)
$1.50/ prata ($1.00 profit)
$1.50/ prata ($1.00 profit)
$1.50/ prata ($1.00 profit)
$1.00/prata ($0.50 profit)
$1.00/prata ($0.50 profit)
$1.00/prata ($0.50 profit)
$1.00/prata ($0.50 profit)
$1.00/prata ($0.50 profit)
$1.00/prata ($0.50 profit)
Cost of 1 prata is $0.50 (Using best available resource , technology and method)
DEMAND AND SUPPLYThe Market for Roti Prata – Perfect Competition
I want it cheapSo many prata stores
MAKE ME PRATA HAPPY!!!
$1.00/prata ($0.50 profit)
$1.00/prata ($0.50 profit)
$1.00/prata ($0.50 profit)
$1.00/prata ($0.50 profit)
$1.00/prata ($0.50 profit)
$1.00/prata ($0.50 profit)
$0.50/prata (no more economic profit) at P= MC
$0.50/prata (no more economic profit) at P= MC
$0.50/prata (no more economic profit) at P= MC
$0.50/prata (no more economic profit) at P= MC
$0.50/prata (no more economic profit) at P= MC
$0.50/prata (no more economic profit) at P= MC
$0.50/prata (no more
economic profit) at P= MC
Cost of 1 prata is $0.50 (Using best available resource , technology and method)
Perfect Competition In a market that is under perfect competition, in the long run
there is no more economic profits (only normal profits) to be made.
DEMAND AND SUPPLY
NO MORENO MORE
NO MORE
DEMAND AND SUPPLY
Economic Profits = (Revenue – Cost of FOP) - Opportunity cost
Economic Profit is Sales Revenue minus all costs including the opportunity cost. Thus economic profit may be lower than the accounting profit. If accounting profit equals the opportunity cost, economic profit is zero.
When Economic Profits = 0 we call this normal profit.
Normal profit is the minimum level of profit needed for a company to remain competitive in the market.
Accounting Profits = (Revenue – Cost of FOP)
BUT
Examples of Perfect Competition(refer to examples on page 29 Tragakes IB Text Book)
1.The International Inter Bank Forex (Currency) Market Interbank Bid/Offer Spread is 0.03 cents for every US$1 traded. ie. For every simultaneous buy/sell
transaction, the bank will only be able to make US$0.03 for every US$1 traded. If there were less buyer/seller, the spread would be wider.
Gold prices very volatile and nobody controls it.
DEMAND AND SUPPLY
Perfect Competition
1. All firms sell an identical product. 2. All firms are price-takers. 3. All firms have a relatively small market share. 4. Buyers know the nature of the product being sold and the prices charged by each firm. 5. The industry is characterized by freedom of entry and exit.
DEMAND AND SUPPLY
The Monopoly Market
“I have control and there is not much you can do!”
DEMAND AND SUPPLY
Microsoft Operating System
Q1. What is it ab0ut Microsoft Vista that you not like?
Q2. What are some of the options that you have to help you address your dissatisfaction with Vista.
In your investment groups, brainstorm for some of the features of microsoft vista that you do not like.
DEMAND AND SUPPLY
The Monopoly Market
The microsoft license
for usage of the
Microsoft Vista software.
DEMAND AND SUPPLY
Q1. How many computers can you load Microsoft Vista into with one original copy in your hands? Ans: 2
Q2. How many times can you reinstall microsoft Vista into your computer?
Ans: 2
Q3. Why would anyone buy a software with a license that only allows you to install on 2 computer or reinstall only 2 times?
Ans: Because we don’t have a choice!
The Monopoly Market
Consumer’s Disadvantages
MONOPOLY of the operating system market
The size of Microsoft is huge!
Homogenous Product
1. Trouble 1 – Microsoft has 92.12% of the operating system software market with small and weak competitors.
2. Trouble 2 – The product (operating system software) does not have substitutes.
3. Trouble 3 – Most competitors to MS’s O/S market are small and insignificant.
4. Trouble 4 – Developing a new software to compete with Microsoft Windows is very expensive and takes a long time to test for workability.Large ($$) barriers to entry
1 firm with virtually no other firms in sight
“Why kill each other by cutting prices, let’s just collaborate and make the consumer pay more instead!!”
DEMAND AND SUPPLY OLIGOPOLY
Organization of Petroluem Exporting Countries(OPEC) The OPEC Cartel
Have you ever observed that gas prices at the pump does not seem to fall even when the international oil prices have dropped significantly?
DEMAND AND SUPPLY OLIGOPOLY
% Change in international oil price from Jan 2008 to Dec 2009 is 72%
% change of average fuel oil price at gas stations in Singapore from Jan 2008 to Dec 2009 29%