determinants of supply price and costs time level of technology uncontrollable factors

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1 emand and supply demand the quantity of a good which consumers want and are willing and able to pay for supply the quantity of a good which suppliers are willing and able to produce determinants of supply price and costs time level of technology uncontrollable factors emand and supply Supply Curves supply and price S S P 2 P 2-1-

2 emand and supply determinants of demand income demand for normal good rises as income rises demand for inferior good falls as income rises price of the good demand falls when price rises, at a given level of incomes price of substitutes / complements a rise in the price of a good will cause a rise in demand for a substitute a rise in the price of a good will cause a fall in demand for a complement emand and supply determinants of demand preference (taste) and advertising an all-embracing term, eg. healthy food, fashion, etc, difficult to quantify advertising may modify preference demographic factors changes in the size and structures of the population may alter the market expectations -2-

3 emand and supply emand Curves demand and price P 2 P 2 emand, Supply and etermination of S P e P 2 Q a Q c Q e Q d Q b -3-

4 Shifts in the emand Curve Movements on emand Curve change in taste S S 2 change S in costs 1 P e P Q e Elasticity elasticity of demand a change in price has two opposing effects on revenue more total revenue (net gain scenario) less total revenue (net loss scenario) responsiveness of the quantity demanded to price elasticity is the units free measure of responsiveness price elasticity Income elasticity cross elasticity negative for complements, positive for substitutes -4-

5 Imperfect markets spectrum of competition perfect competition many very small producers monopolistic competition oligopoly a few large producers monopoly one producer only Imperfect markets monopoly conditions for a monopoly to occur only one supplier of the good exists there are barriers preventing other firms from entering the industry monopoly in the short run its cost curves are similar of any producer the demand curve the output decision -5-

6 Monopolist s Costs and Output ecision MC ATC P* A supernormal profit C B MR ATC is minimum =AR Q* Imperfect markets barriers to entry under legislative perfect barriers competition supernormal protection of intellectual profits could property not persist into the long run firms protection outside of physical the industry property are attracted control under of monopoly, labour supply barriers prevent this from happening through trade union, professional bodies control of a natural resource economies of scale high initial cost of entry advertising research and development -6-

7 Imperfect Monopoly markets and Perfect Competition Compared monopoly and perfect competition compared MC P m ATC P p Q m MR Q p =AR Imperfect markets disadvantages of monopoly monopolist makes supernormal profit by producing less operates at above minimum average cost advantages of monopoly able to achieve lower costs than the firms in perfect competition price discrimination -7-

8 Imperfect markets price discrimination characteristics occurs when a product is sold at different prices in different markets consumers are being exploited could not occur in a perfectly competitive market may allow greater access to goods and services conditions separate market with different demand curves markets must be segregated higher price will be charged when demand is inelastic no possibility of resale by one consumer to another Monopolistic competition characteristics large number of firms compete each firm produces a differentiated product which is a close but not perfect substitute for the other firms are free to enter and exit price and output in the short run, it looks just like a monopoly a firm charges the highest price, where MR = MC in the long run, it will attract new entrants the firm s demand curve and marginal revenue start to shift leftward until long run equilibrium -8-

9 Monopolistic competition efficiency the market structure is inefficient, as price exceeds marginal cost firms are not producing at full capacity firms incur higher selling costs in designing, packaging, marketing Monopolistic Monopolistic competitioncompetition characteristics MC P S P L / C economic profit in the short run E S E L ATC MR L Q MR S L S excess capacity -9-

10 Oligopoly characteristic a small number of producers compete producers possess similar knowledge and expertise quantity sold by one producer depends on price, and the other producers prices and quantities sold models kinked demand curve dominant firm oligopoly cartels game theory Oligopoly Kinked emand Curve kinked demand curve MC assumptions 0 if a firm raises its price, others MC will 1 not follow if H a firm cuts its price, other firms will cut theirs too P* L a b MR Q* -10-

11 Oligopoly kinked demand curve assumptions if a firm raises its price, others will not follow if a firm cuts its price, other firms will cut theirs too price and output a firm does not change its price or its output for small fluctuations of its marginal cost between a and b price increases if marginal cost rises beyond point a summary the demand curve has a kink at the current price the marginal revenue curve is discontinuous price is sticky unless a large change in marginal cost Small Firms & emand ominant Firm MC S as market demand not captured supplied by the dominant by small firmfirms MR X -11-

12 Cartel S P* P e Q e Oligopoly game theory invented in the 1940 s, is a method of analyzing strategic behaviour all games have four features rules, strategies, payoffs, and outcomes rules of the oligopoly game the number of firms (players) in the market economic profit which equals total revenue minus opportunity cost the laws about competitive practices, eg. anti-trust and anti-combine laws -12-

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MBA 640 Survey of Microeconomics Fall 2006, Quiz 6 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A monopoly is best defined as a firm that