Module 5 part 2
Module 5 part 2 ECON 224 002
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This 19 page Class Notes was uploaded by Brianna Dwinnell on Thursday October 1, 2015. The Class Notes belongs to ECON 224 002 at University of South Carolina taught by Elizabeth Marie Breitbach in Summer 2015. Since its upload, it has received 43 views. For similar materials see Introduction to Economics in Economcs at University of South Carolina.
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Date Created: 10/01/15
ECON 224 09242015 Module 4 Types of Markets Four Market Models Pure Competition Pure Monopoly Monopolistic Competition Oligopoly Characteristics 0 How are prices determined 0 How easily can rms enter and exit the market 0 Are there many substitutes or brands of the product How similar are the brands o Other distinguishing features Pure Competitionmany rms all competing for your business 0 Farmers Market 0 Many kinds of tomatoes many sellers multiple buyers 0 Price is determined in the market 0 The goods offered for sale are largely the same 0 Firms can freely entry and exit the market Pure Monopoly goal is to collect all the money One person selling all the products 0 Long road with only one service station Only 1 option 0 Single seller 0 Price maker sellers determined the price not market 0 No close substitutes 0 Blocked entry strong barriers to entry block potential competition 0 EX 0 Public utilities natural gas electric water 0 Near Monopolies De Beers diamonds WhamOfrisbees 0 Professional sports teams one team per state 0 Barriers to entry a factor that keeps rms from entering an industry 0 Economies of scale smaller scale new rms have a dif cult time entering into the market due to high xed costs 0 Legal barriers patents and licenses 0 Ownership of essential resources caves etc 0 Pricing stashing rates to keep competitors out a Price Discrimination o Monopolies are price makers 0 Price Discrimination Charging different buyers different prices Price differences are not based on cost differences 0 Want to price discrimination if sellers know buyers willingness to pay can gain a greater revenue 0 Conditions for success Monopoly Power need to have some control over the price Market segregation can separate those with high willingness to pays with those who have low willingness to pay Cannot resell the product 0 EX Flights Business travelers and vacationers biz will pay more because usually it s last minute and their company pays for it Also plan couple days in advance while vacationers pay way in advance with the cheapest ights Utilities n Peakhourcharges Coupons n Discounts for those willing to spend the time Post Of ce reverse a Same price to send a letter down the street and across the country Monopolistic Competition 0 Market for paper towels prices vary from 69 199 o Bounty stronger brand better than other brands Relatively large number of sellers 0 Small Market Shares no market control 0 No Collusion sellers are not working together 0 Independent Action little incentive to cut prices to drive other sellers 0 Easy Entry and Exit 0 Not as easy as perfect competition 0 Small concentration ratio not as small as competitive Differentiated Products 0 Product Attributes physical or quality differences EX Pay more for nike because its better quality than walmart 0 Services expertise 0 Location location and accessibility of stores 0 Brand Names and Packages Celebrity association Fancy packaging Wording of product pretty wine bottle cool beer bottle etc o Leads to some control over price 0 Product Variety o The rm constantly manages price product and advertising Better product differentiation Better advertising 0 The consumers bene t from the greater array of choices and better products Types and styles Brands and quality Olidooolv 0 Small town with only 2 bars 0 One offers special on beer other on mixed drinks 0 Can either pay more for beer and cheaper mixed drinks or visa versa 0 One will gain extra revenue allowing them to earn maximum earnings 0 A few larger producers concentration ratio near 100 0 Products can be homogeneous or differentiated 0 Can either all have same product or different things 0 Limited control over prices 0 Mutual interdependence quality produced by others affects the price others receive 0 Strategic Behavior self interested behavior takes into account retaliations 0 Entry Barriers Collusion o Cartel a formal agreement among producers to set the price and the individual rm s output levels of a product lllegal to have cartel in US Formally agree to the price Set output levels for its members 0 Joint Pro t Maximization o The rms work together to produce monopoly level maximize total pro t Firms have an incentive to cheat and gain slightly more pro t for them selves o Collusion is illegal in the US Ex OPEC local beer sellers etc Ef ciency 0 Competitive markets are the most ef cient markets market is in equilibrium o Equilibrium price is low and the equilibrium quantity is produced and consume 0 Other markets the prices are set above equilibrium price quantity bought and sold in the market are less than the equilibrium Markets are not ef cient Governments sometimes intervene to improve market outcomes Concentration Ratio 0 Economists use to determine how competitive the market is 0 Concentration ratios are the sum of the ratios for the top four rms Monopoly and oligopoly have concentration ratios of 100 or very close to it o The smaller the percentage the more competitive the market IS Demand Demand is the schedule or a curve that shows the various amounts of a product that consumers will purchase at each of several possible prices during a speci ed period of time Amount consumers are WILLING and ABLE to purchase at a given price Can look at demand at 0 Individual level 0 Market level Law of Demand Fundamental characteristic 0 Other things equal as price falls the quantity demanded rises and as price rises the quantity demanded falls There is an inverse relationship between price and quantity demanded Law of Demand 0 Law of demand is consistent with both common sense and observation Price is an obstacle that deters people from buying The higher that obstacle the less of a product they will buy the lower the obstacle the more they will buy When looking at a graph there will be a curve starting high on the y axis and curving inward a bit and down to the right on the x axis 0 When demand is increased the curve will shift outward or to the right because they will be needing more of that product 0 When the demand is decreased the curve will shift inward or to the left because they do not need as much of the product The Demand Curve 0 The inverse relationship between price and quantity demanded for any product can be represented on a simple graph It measures quantity demanded on the horizontal axis and price on the vertical axis Determinants of Demand 0 Factors other than price that locate the position of a demand curve 0 They are the quotother things equalquot in the relationship between price and quantity demanded Price Elasticity of Demand Shows the slope of the demand curve Measures responsiveness of the quantity of a product demanded by consumers when the product price changes Consumers are sometimes price sensitive a small price change can lead to a large change in demand 0 Economics say that the demand for such products is relatively elastic or simply elastic Other times consumers do not change demand or change their demand only slightly for large changes in o Other products ex Medical care consumers pay much less attention to price changes The demand for such products 5 relatively inelastic or simply inelastic Extreme Cases 0 This is where the demand line is perpendicular to the xaxis It is a perfectly inelastic demand and is very rare The demand curve would be vertical and parallel to the vertical y axis The elasticity coef cient is 0 EX a diabetic s demand for insulin Another example would be if the line was parallel to the xaxis and perpendicular to the yaxis Happens in which a small price reduction would cause buyers to increase their purchases from zero to all that is possible to obtain The elasticity coef cient is in nite EX the demand curve in a purely competitive industry of a rm that is unable to change the price A small price reduction would lead to a slight increase in the purchases from 0 to all that is possible to obtain Perfectly elastic demand Demand curve would be horizontal The elasticity coef cient is in nite A perfectly inelastic demand is the demand curve in a purely competitive industry of a rm that is unable to change the price Products that are lnelastic Newspapers Bread Cigarettes Eggs Medical care Products that are Elastic Fresh foods Restaurant meals Motor vehicles Land Fresh meats Supply 0 Can be depicted as a schedule or curve Amount producers are WILLING and ABLE to sell at a given price We look at 0 Individual supply 0 Market supply Law of Supply 0 Other things equal as price falls the quantity supplied falls and as the price rises the quantity supplied increases 0 Other Things Equal Assumption Same as the Law of demand Only difference price and quantity are at a higher price 0 Higher prices therefore create a pro t incentive to produce and sell more of a product Price Elasticity of Supply 0 Measures sellers responsiveness to price changes Elastic Supply producers are responsive to price changes Inelastic supply producers are not responsive to price changes 0 Time is the most important determinant Immediate market period Short run Elasticity of Supply the Market Period Perfectly inelastic supply graph 0 There is no time to adjust a price change making the supply perfectly inelastic o The increase in demand does not change the quantity at all In the case of a tomato farmer on market day goes to the market and upon arrival realizes the price is much higher lower than anticipated The farmer cannot increase decrease the amount supplied this is the market period Elasticity of Supply the Short Run 0 In the short run Supply is more elastic than in the market 0 There is enough time to adjust output by increasing or decreasing the variable inputs but not the xed inputs 0 Supply is more elastic than in the market period Resulting in a smaller increase in the price but also increase in quantity n Graph line is perpendicular to xaxis 0 Tomato farmer can increase decrease the supply somewhat by increasing decreasing the variable inputs like labor fertilization irrigation etc Cannot increase decrease the size of the farm in this time period because farm size is xed a Graph line is perpendicular to xaxis but top of line is slanted to the right a little Elasticity of Supply the Long Run 0 Supply is even more elastic than in the short run 0 In the long run there is enough time to adjust output by increasing or decreasing all inputs since all inputs are variable by this time Supply will be even more elastic 0 With the same increase in demand there s an even greater increase in quantity than in short run But smaller increase in price 0 In the long run all inputs are variable even the farm size 0 0 Tomato famer can expand reduce the size of the farm in regards to longrun price increases Market Equilibrium Equilibrium occurs where the demand curve and supply curve intersect 0 Prices uctuate to move the market toward equilibrium 0 The price where the demand and supply curves intersect is known as the Equilibrium Price 0 The quantity where the demand and supply curve intersect is known as the Equilibrium Quantity When the Market Changes Law of 0 Demand 0 Other things equal as the price increases the quantity demanded decreases Supply 0 Other things equal as the price increases the quantity supplied increases 0 What about Other Things Equal Changes in Equilibrium 0 Ask yourself the following questions 0 Does this event impact demanders or sellers 0 Does this event increase or decrease demand supply 0 What will happen to the equilibrium price Equilibrium quantity 0 Does this change demand or supply at all price levels Increase of decrease 0 Does this change the quantity demanded or quantity supplied Increase or decrease o EX Seahawks win the Super Bowl 0 How does this impact the market for Seahawaerseys O 0 Demand or Supply Demandmore people are going to want to buy jerseys Increase or decrease Increase demand a Doesn t matter what the price is people are still willing to purchase jersey Equilibrium price Equilibrium quantity Price increases and Quantity increases Does this change demand or supply Increase or decrease Demand has increased at all price levels Does this change the quantity demanded or quantity supplied Increase or decrease Increase in the Quantity Supplied EX Everyone must hold health insurance 0 How does this impact the market for health insurance 0 O 0 Demand or Supply Demand new buyers entering into the market Increase or decrease Increase in demand people who were not willing to buy before now have to Equilibrium Price Equilibrium quantity O O Increase in price and quantity Does this change demand or supply Increase or decrease Demand has increased at all price levels Does this change the quantity demanded or quantity supplied Increase or decrease Increase in the Quantity supplied 0 EX Incomes in the US are lower than in 2008 o How does this impact the market for new automobiles O 0 Demand or supply Demand Increase or decrease Decrease Equilibrium price Equilibrium quantity Price and Quantity would decrease Does this change demand or supply Increase or decrease Demand would decrease at all price levels Does this change the quantity demanded or quantity supplied Increase or decrease Quantity supplied would decrease Changes in Demand 0 The reverse is true for inferior goods an increase in peoples income decreases demand for the product A decrease in income leads to greater consumption of these goods 0 O Examples of Interior Goods Ramon Noodles Generic Grocery Products Used cars etc Examples of Normal Goods Books new Automobiles Candy etc EX Chevy Decreases the price of cars 0 How does this impact the market for Ford cars 0 0 Demand or supply Demand Increase or Decrease Decrease Equilibrium price Equilibrium quantity Decrease in price and quantity Does this change demand or supply Increase or decrease Decrease the demand on all levels Does this change the quantity demanded or quantity supplied Increase or Decrease Decrease in quantity supplied 0 EX Apple cuts the price of the iPad How does this impact the market for Apps O O 0 Demand or supply Demand Increase or decrease Increase Equilibrium price Equilibrium quantity Price and Quantity increase Does this change demand or supply Increase or decrease O Demand has increased Does this change the quantity demanded or quantity supplied Increase or Decrease Quantity supplied increases EX Minimum Wage Increases How does this impact the market for Fast Food 0 O O O 0 Demand or Supply Supply Increase or Decrease Decrease Equilibrium price Equilibrium quantity Price Increases while Quantity Decreases Does this change demand or supply Increase or decrease Supply Decreases at all price levels Does this change the quantity demanded or quantity supplied Increase or Decrease Quantity demanded decreases EX CVS Stops Selling Cigarettes How does this impact the market for cigs O 0 Demand or Supply Supply they stop selling Increase or Decrease Decreases o Equilibrium price Equilibrium quantity Price Increases while Quantity Decreases less suppliers more expensive less buyers 0 Does this change demand or supply Increase or decrease Supply Decreases at all price levels 0 Does this change the quantity demanded or quantity supplied Increase or Decrease Quantity demanded decreases o EX People prefer to watch horror movies driving up the pro ts from these movies 0 HINT people seeing the movie does not care about the pro t The SUPPLIER cares about the pro t Supplier is the main focus 0 How does this impact the market for romantic comedies 0 Demand or Supply Supply 0 Increase or Decrease Decrease o Equilibrium price Equilibrium quantity Price increases and Quantity decreases 0 Does this change demand or supply Increase or decrease Decrease in supply on all levels 0 Does this change the quantity demanded or quantity supplied Increase or Decrease The quantity demanded decreases Change in Demand Expectations of Price and income also change demand 0 Price 0 If consumers expect the price will increase in the future they will buy the product now 0 Waiting to buy a swimsuit until the fall 0 Income 0 If consumers expect their income to increase in the future they will purchase more now 0 Celebrating a pay raise before it is received Changes in Demand Other Things AREN T Equal Change in consumer tastes or preferences 0 Net ix came about no more wanting DVDs or cable as much as net ix Change in the number of buyers 0 Health care mandateforced to enter the market 0 Change in income 0 It depends Normal or Inferior Good Income goes upmore normal goods ess inferior Income goes downmore inferior Iess normal 0 Price of Related Goods 0 It depends Complements or Substitutes Change in consumers expectations 0 Future Prices 0 Future Income How will this effect your income today Changes in Suppy Other Things AREN T Equal A change to the cost of production 0 A change in resource prices 0 A change in technology A change in the number of sellers A change in taxes and subsidies A change in the price of related goods A change in producer expectations Change in Demand vs Change in Quantity Demand 0 Change in demand is a shift in the demand curve 0 Caused by a change in quotother things equalquot 0 Causes a change in the quantity supplied 0 Change in quantity demanded is a movement from one point to another point on a xed demand curve 0 Caused by a change in supply 0 Leads to a change in the equilibrium price 0 Then movement along the demand curve Change in Supply vs Quantity Supplied Change in Supply is a shift in the supply curve 0 Caused by a change in quotother things equalquot 0 Causes a change in the quantity demanded Change in quantity supplied represents a movement along a supply curve o Caused by change in demand 0 Leads to change in equilibrium price 0 Then movement along the supply curve When the government intervenes Price Ceilings a legal maximum on the price of a good or service 0 Binding when set below equilibrium price 0 Rationing problem 0 Black markets Example Rent control A price ceiling above the eq m price is NOT BINDING has no effect on the market outcome The eq m price 800 is above the ceiling and therefore illegal The ceiling is a BINDING CONSTRAINT on the price causes a shortage Gov Set Prices With a shortage sellers must ration the goods among buyers Some rationing mechanisms 1Long lines 2 Discrimination according to sellers biases These mechanisms are often unfair and inef cient the goods do not go to the buyers who value them most highly EX 0 Price oors a legal minimum on the price of a good or service Binding when prices are set above the market price Chronic surpluses 0 Ex minimum wages o