Introduction to Agricultural & Resource Economics
Introduction to Agricultural & Resource Economics ARE 201
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This 3 page Class Notes was uploaded by Norbert Terry on Thursday October 15, 2015. The Class Notes belongs to ARE 201 at North Carolina State University taught by Michael Walden in Fall. Since its upload, it has received 6 views. For similar materials see /class/223759/are-201-north-carolina-state-university in Agricultural & Resource Econ at North Carolina State University.
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Date Created: 10/15/15
Lecture 7 Market Structure I l N E 4 V39 0 Perfect Competition A quotperfectly competitivequot market has the following characteristics each business sells the exact same product each business is relatively small and can39t affect the price of the product each business is a quotprice takerquot meaning the price is set in the bigquot market of all the businesses interacting with demand new businesses can easily enter and existing businesses can easily exit the market each business generally makes only quotnormalquot profits quotabove normalquot or quotbelow normalquot profits can only be earned for a short period of time Easy entry and exit keep profits quotnormalquot if profits are higher than normal new businesses enter the market supply is increased and price falls restoring normal profits If profits are lower than normal some existing businesses leave the market supply is decreased and the price rises restoring normal profits If there are any differences in price they will re ect cost differences eg extra cost of dry cleaning women s blouses by hand vs by machine for men s shirts Individual business in perfect competition will take product price as quotgivenquot and then determine output that will maximize profits Will produce more the higher the price In perfect competition business people are constantly trying to quotfind an edgequot to make the product cheaper If they can they will be able to earn quotabove normalquot profits for at least a short period of time until others copy Policy Impact Ifbusinesses in the market are temporarily making abovenormal profits they will be motivated to try to get laws passed to keep out new businesses from entering the market II Monopolistic Competition N E 4 V39 Businesses in a perfectly competitive market will try to quottweakquot their product so it is perceived by consumers as not being interchangeable with similar products Examples Fastfood restaurants don t just sell hamburgers but sell burgers with quotspecial saucequot or quot ame broiledquot burgers or burgers with beefbought from the quothigh plainsquot Auto manufacturers don t just make cars but make cars having different images and features Mr Pizza emphasizes that his sauce is made quotfrom scratchquot and his cheese and meat are fresh not processed Some of this quottweakingquot may be real some may be contrived it s up to the consumer to judge One quotrealquot feature is location businesses at the quotbestquot locations know these sites can t be copied Advertising and brand loyalty are used to cement these differences The point is if a businesses can create quotuniquenessquot for its product then the business will be able to set its own price quotprice setterquot and this price will be higher than the comparable price in a perfectly competitive market Also any abovenormal profits won39t be eaten away by new businesses producing the same product because no one sells exactly the quotsamequot product All firms in perfectly competitive markets strive to move away from that market into monopolistic competition where they hope to make permanently abovenormal profits But monopolistic competitive businesses walk a fine line They constantly must determine if the higher price they can charge compared to a perfectly competitive business can be sustained by the unique features of the product or will consumers refuse to pay and go for the lower priced alternative are pizza customers willing to continue to pay for Mr Pizza s fresh ingredients Monopolistic competitive businesses will try to find the combination of price and output that will maximize their profits But must worry about price elasticity of demand that is when increase price lose customers III Monopoly a a single seller with total control over price setting b price will be higher than in perfect competition but monopoly must still worry about elasticity of demand curve c makes permanent aboveaverage pro ts d how to get to be a monopoly exclusive control over a resource constantly declining marginal cost as output increases means only the largest company will survive power plants called quotnaturalquot monopoly government granted monopoly local cable TV patents for inventions e monopolies usually don t last there s a strong incentive for substitutes to be developed satellite as a substitute to local cable f quotnaturalquot monopolies will be regulated by the government g like monopolistic competition try to nd combination of price and output that will maximize pro t IV Oligopoly lt a a relatively small number of businesses in the industry b collusive oligopoly the businesses get together collude to collectively agree on price and output that will maximize their collective pro ts then must decide on a way to distribute the pro ts examples OPEC professional sports leagues c collusive oligopolies are illegal in the US except in the case of professional sports leagues d problem with collusive oligopolies incentive for member businesses to quotcheatquot produce more than their allocated output to make more pro t if this happens price will fall and agreement will come apart Market Segmentation a practiced by r quot quot r quot and r quot quot competitors b also called price discrimination c means selling the same product to different buyer groups at different prices d motivation increase pro t e rule higher price is sold to buyer groups with inelastic demand lower price is sold to buyer groups with elastic demand f numerous examples airlines leisure vs business travelers resorts peak season vs offpeak season senior citizen discounts bulk buying
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