Week 11 and 12 Notes
Week 11 and 12 Notes Econ202
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This 7 page Class Notes was uploaded by Sydney Dingman on Saturday April 9, 2016. The Class Notes belongs to Econ202 at Colorado State University taught by Professor Christopher Blake in Winter 2016. Since its upload, it has received 25 views. For similar materials see Principles of Microeconomics in Economcs at Colorado State University.
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Date Created: 04/09/16
ECON202 Week 11 3/29/16, Module 24, Introduction to Market Structure Four types of Market Structure: o Perfect Competition o Monopolistic Competition Less o Oligopoly Competitive o Monopoly Price Taker: a firm that has no ability to impact the market price Price Maker: a firm that has the ability to impact the market price in some way o Market Power: ability to impact the market price Continuum of Competitiveness Perfect Competition o Market characterized with a lot of buyers o Market characterized with a lot of sellers Price takers ^^ o Every buyer in the market views the product being sold as an identical product Every firm sells the exact same thing Consumers shop based on price alone Firms have no incentive/ability to raise price because they will lose all customers they would have otherwise o No barriers to entry or exit Nothing to prevent firms from getting into or out of the market E.g. existing firms in a market are earning economic profit (>0) generates an incentive for new firms to enter Economic profit has to be equal to zero in the long run (=0) as firms enter and take from existing firms o E.g. wheat: Monopolistic competition o Many buyers o Many Sellers Price makers o Differentiated products Consumers will see the difference and change the willingness to pay for the product; no longer price shop exclusively market power to firms o No barriers to entry or exit =o in the long run, will always be the case with no barriers o E.g. fast food, computer companies, clothing, restaurants Oligopoly o Many buyers o Few large, dominant sellers price makers Dominant- could be many sellers, but there are a few that dominate the market and set the tone of the market and act as leaders o Sell a product o High barriers to entry and exit prevents firms from easily coming into the market >0 in the long run o E.g. Computers, grocery stores, tv providers, car dealerships, cereal, airlines, banking Monopoly o Many buyers o One dominant seller o Unique product of some kind o High barriers to entry and exit >0 in the long run o E.g. diamonds (De Beers), pharmaceuticals (oligopoly), Comcast, utility companies Monopsony o Market dominated by a single dominant buyer Dominant buyer: has market power 2 o E.g. anything military related: nuclear weapons, general managers of professional sports teams, Walmart Module 25: Perfect Competition Optimal production rule- produce at a level, qstar where MR=MC o Recall: firms are price takers o Firms can produce and sell as much as they want at the market price, pstar 3/31/16, Module 25: Perfect Competition cont. Marginal revenue for a perfectly competitive firm is perfectly elastic (horizontal) o Firms are price takers o Consumers will no longer buy any quantity from the firm if it attempts to change from the market price Recall: = TR-TC o Rewrite this to see easier ATC = TC/q TC= ATC(q) TR = P(q) = P(q)-ATC(q) (P-ATC)q= 3/31/16, Module 26- Graphing Perfect Competition 3 Econ202 Week 12 4/5/16, Module 27, Long Run Outcomes in Perfect Competition Firm Options o Short Run Produce (MR=MC) Shutdown (P<AVC) o Long Run (no fixed costs) Produce (MR=MC) Exit the market entirely When a firm exits, they close their doors permanently because they are better off doing something else Firm profits () have to be equal to zero in the long run o Usually, we start with a graph in which the firm is earning =0, describe a shock (change in market conditions), then finally show how the market gets back to =0 o Example: In the market for eggs, bird flu concerns make consumers weary of buying eggs (graphs in black notebook) MC and ATC do not need an index on the second graph because we will never be shifting them around. Shock causes demand to shift left (tastes and preferences) new short run outcome (index of 2) <0 for all firms Assuming that firms P2star >= AVC, they will produce in the short run (can’t leave the market) o In the long run, firms are not tied down by fixed costs, so they can enter and exit as they please. Existing firms could be doing better elsewhere so they will begin to exit the market As they exit, supply begins shifting to the left This happens until the long run outcome where profit equals 0 (index of 3) o Egg market again, study shows that eggs help prevent cancer (KNOW THIS FOR SHORT ANSWER!!!) Short run: Demand increases, market quantity increase, market price rises marginal revenue rises because firms are price takers >0 in the short run Long run: more firms will enter the market and supply shifts to the right. Supply curve then shifts right until the intersection of supply and demand is at P1star again =0 4/5/16, Module 28, Monopoly in Practice Firms are always trying to get market power. o Firms have the ability to change price without losing all of their customers o In monopolies, they are successful When the monopoly raises prices, some customers will leave, but many will stay because they can’t go anywhere else, there are no other options o When there are no other options, this creates a Wedge between demand and marginal revenue The monopoly firm faces the entire market demand curve (because every consumer has to go to them) o Example: Look at demand schedule for a monopoly (in black notebook) Marginal Revenue lowers (as quantity increases) gaster than demand lowers 4/7/16, Module 28 cont. For a monopolist, raising your price of the good or service has two effects on total revenue o Price Effect: positive as we raise prices because each unit sells for more. Did not exist in perfect competition o Quantity Effect: negative as we raise prices because quantity demanded will fall some consumers won’t buy 2 only effect that existed in perfect competition o These two effects combines generate the “wedge” between marginal revenue and demand o Black notebook for graph of this (general monopoly graph) This graph represents both the short run and long run outcome for a monopoly o In the long run, profits are going to be positive for the monopolist due to barriers to entry Barriers to Entry o Control over a scarce resource or key input E.g. De Beers (diamonds) owns most of the diamond mines throughout the world, they mine diamonds, remove most from circulation allows them to drive price up o Increasing returns to scale (over the relevant production range) As we increase production, ATC falls Black notebook Has the tendency to generate a “natural monopoly” only type of monopoly that we may want to allow to exist in society E.g. utilities, water, sewer, electricity, Comcast, telephones o Technological superiority Most difficult barrier to maintain Firms that are more technologically developed can make it impossible for new firms to compete with them E.g. Intel computer chips in the 1970s-1990s (this monopoly power fell as AMD became a legitimate competitor) o Government created barriers to entry Government sometimes grants monopoly power to firms Patents- grant exclusive production rights for the patent holder Temporary (about 20 years) 3 Without patents, there is less incentive for innovative firms to create new products through research and development Granting monopoly power is a “reward” for innovation Copyrights and trademarks effectively do the same thing as a patent E.g. pharmaceutical (patents) Monopoly versus Perfect Competition o Black notebook o Monopoly outcome has restricted quantity, higher prices, and positive profits for firms 4
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