Warm Up #83/03/2015 Explain the difference between the elasticity of demand and the elasticity of supply. Draw a graph illustrating a price floor and explain it’s location on the graph. Who does a price floor benefit? Draw a graph illustrating a price ceiling and explain it’s location on the graph. Who does a price ceiling benefit?
Warm Up Pg 165 in your book: 19. A-C A-D If you finish work-on your vocab
Chill Soda chill-soda/ chill-soda/ What are the biggest soft drink manufacturers? What are the similarities and differences in these companies? How is chill soda differentiated? What problem did the sharks have with chill soda? Would you invest in chill soda?
Market Structures All the companies that sell a product are called a market. All markets fit into one of the following market structures that reflect the nature and degree of competition in the market. Perfect Competition Monopolistic Competition Oligopoly Monopoly
Perfect Competition Large number of buyers and sellers who exchange nearly identical products. No single seller is large enough to single-handedly affect the price Each buyer and seller acts independently. Because no one firm can control a big chunk of the market, the equilibrium price is set in the market. For this reason, they are called price takers – they have no control over the price. If a perfectly competitive firm increases their price, they sell nothing. If they decrease their price, they would be subtracting from their profit
Perfect Competition, Continued Perfect competition is an ideal that is hard to achieve in real life. The closest example to it is the market for local agricultural products – tomatoes, corn, eggs, apples, chickens
Monopolistic Competiton Many competing producers – most businesses fit into this market. Easy to enter market Similar to perfect competition except products are different. Limited control over prices Product differentiation - If they can differentiate their product over the competitor in the mind of the consumer, they can charge more for the product Advertising is essential - This explains why they spend so much advertising. (Branding)
Monopolistic Competition Examples
Oligopoly There are a few large firms producing the product that control the market. There is limited entry into an oligopoly because it is difficult and expensive to be widely recognized and accepted Interdependent behavior - Each firms pricing decisions greatly affect others in the market. Compete in price wars that drive weaker companies out of business. Often try to compete by enhancing product which puts the other firm at a disadvantage. Oligopoly which firms cooperate to fix prices (called colluding) is called a cartel – example: OPEC
Oligopoly Examples AutomobilesAirlinesSoft Drinks colacompany.com/brands/p roduct_list_a.html brands/Pepsi_Cola- Brands.html
Monopoly Opposite of perfect competition. One firm that has total control over price of good or service. Known as a price maker Could Take advantage of customers by raising costs and limiting supply – so the government prevents them.
Natural/Gov’t Some monopolies are allowed to exist because their benefits outweigh their costs. Natural monopolies – production costs are minimized by having a single firm produce a product Example: public utilities – electric companies, phone companies – costs would increase for consumers if each firm had to put up electric or phone lines Government Monopoly – owned and operated by the government Example: Water
Technological Monopoly Technological monopolies – based on ownership or control of a manufacturing method, process, or scientific advance. The gov’t grants a patent – (exclusive rights) Otherwise, inventors would never make a profit and there would be no incentive to create new things.
Geographic Monopoly Absence of other sellers in a geographic area Example: The only gas station on a lonely interstate highway exit
Market Structures Perfect Competition Monopolistic Competition OligopolyMonopoly XXXXXXXX XXXXXXXX XXXXXXX XXXXXX X = the numbers of sellers