Ec102 may 03

MARKET STRUCTURESEc102 D - May 05, 2011

MARKET STRUCTURESCompetitivePerfect – Dating MonopolisticMonopoly – Princess, SupermanMonopsony – Prom DateOligopoly – Exam, Mean Girls

DETERMINANTS OF MARKET STRUCTURESNumber of FirmsFreedom of entry and exitNature of the product – homogenous (identical), differentiatedControl over supply/outputControl over price

MARKETSGroup of buyers and sellersType of market structure influences how a firm behaves:PricingSupplyBarriers to EntryEfficiencyCompetition

PERFECTLY COMPETITIVEMany buyers and sellersFreedom of entry and exitNature of the product – homogenous (identical)Control over supply/output – market Control over price – market

MANY BUYERS AND SELLERSActions of any single buyer or seller has a negligible impact on the market priceRESULT: Price takersSince each has negligible impact, each buyer and seller will just take/accept whatever the market price is

MANY BUYERS AND SELLERSMarket for StarapplesAve price is P30 per kgIf one seller sets its price at P40, buyers will not buy from that sellerIf s/he sets price at P20, other seller will intervene (kill her, kidding)No choice but to take P30 price

FREEDOM OF ENTRY AND EXITIf someone wants to start a firm, goIf someone wants to leave, fineBecause it is free, as long as it is profitable, many sellers will enter, many buyers will buyResults to negligible impact of each buyer or seller

HOMOGENOUS PRODUCTSProducts are largely the sameSince there are many firms with the same product and same price, buyers can easily transferSince there are many buyers who want the same product, firms can ignore those who won’t take their price

OUTPUT/PRICEDetermined by market forces of supply and demandMarket demand and market supply in equilibriumProfit Max: P=AR=MRAR=TR/Q

OUTPUT/PRICEP=AR=MRAR=TR/QIf Q increases  TR = PQ OUTPUT effect – More Q, TR increasesNO PRICE effect since they are price takers

PERFECTLY COMPETITIVEBoys and girls on campusSame girls/boysIf you don’t take it, someone willMineral Water in SM MallsMovie Tickets in the same mall chainClasses with different profs

MONOPOLYOnly 1 firm selling particular g/sBarriers to entry exists: firms cannot enter the market and competeProduct has no close substituteControl of price: Monopolist

NO CLOSE SUBSTITUTESDemand tends to be inelasticIf buyers do not like the price of the monopolist, they cannot buy it anywhere elsePrime example: Meralco and electricity

BARRIERS TO ENTRYResources: Key resource for prod’n owned by a single firmGov’t regulation: gov’t gives a single firm exclusive right to produce g/sProd’n process: Single firm can produce output at a lower cost than can a larger number of producers

BARRIERS TO ENTRYResources: Key resource for prod’n owned by a single firmExample: WaterRarely happensResources are owned by many people

BARRIERS TO ENTRYGov’t regulation: gov’t gives a single firm exclusive right to produce g/sSometimes politicalPatent and Copyright – lead to higher pricesBUT encourages research and more productivity

OUTPUT/PRICEMR < PAs Q is increased, P must be decreasedIf Q increases  TR = PQ OUTPUT effect – More Q, TR increasesPRICE effect – P falls, TR decreasesProfit Max: MC=MR

MONOPOLYPrincessOnly producer of…princessnessBuyers (suitors) have no other optionSuarCan do everythingNo one can competeMeralco

MONOPOLISTIC COMPETITIONMany buyers and sellersFreedom of entry and exitDifferentiated Products – similar but not identicalExample: Low Price Edition booksDifferent EditionsControl over supply/output – monopoly

MONOPOLISTIC COMPETITIONDownward sloping demand curveProfit Max: MR=MCP>MC Same as monopolyP=ACSame as Perfectly Competitive

MONOPOLISTIC COMPETITIONDifferences from Perfectly CompetitiveExcess Capacity – producing below capacity because if Q is increased, P has to be decreasedMark up over Marginal Cost – P>MC because firm has market power

MONOPOLISTIC COMPETITIONBoys and girls on campusNot really perfectly competitiveSimilarity – same genderBut not identical – each uniqueEach has a monopoly of his/her traitsClasses with different profs

OLIGOPOLYMany buyers and FEW sellersHigh barriers in entry and exitProducts may/not be differentiatedPrice setterInterdependence among firmsCooperationSelf-interest

OLIGOPOLYCollusion – an agreement among firms in a market about quantities to produce or prices to changeKim and Gabe last FridayCartel – group of firms acting in unisonActs as a monopoly

OLIGOPOLYMean Girls – HIGH barrier to entryExam – producers have the bargaining chipOil giants – Petron, Caltex, ShellCannot collude explicitlyBut notice that when one increases its price, the rest follow

ACTIVITY #12 students same birthdayMinus 2 in the Midterm Exam GradeSuspected of cheatingIf proven – 0 in the Midterm Exam Grade

ACTIVITY #1Options:If one confesses and the other doesn’tThe one who confessed will not get any deductionThe one who doesn’t will get 0If both confessesBoth get only minus 5

THIS WEEKFRIDAYQuiz on Market StructuresPrice and Output Determination in Mon, MonCom, OligopolyMarket FailuresPARTYIN PARTYIN YEAHFUN FUNFUN, LOOKIN’ FORWARD TO THE WEEKEND

DUE ON MONDAYShort paper on the film for Friday1 full page (until bottom)Refer to syllabus for formattingOutline for your video presentationConceptBasic flow

GROUP QUIZAMPC and the blue book marketMarket for autoload/e-loadTuron market in the AteneoGrades in Ec102 D classMarket of all Ec102 classes in the Ateneo

Ec102 may 03

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