Competition and the Market Dr. Mohamed Riyazh Khan DoMS - SNSCE

The function of Price Price brings quantity supplied in line with quantity demanded. As a good becomes relatively more scarce, price will go up. How does this impact firms and consumers?

Markets can be characterized by how prices for goods and services are determined

Major Market Structures Perfect competition Monopolistic competition Oligopoly Monopoly

Forms of Market Competition Perfect Competition Monopoly Monopolistic Competition Oligopoly

The Competitive Model The process of competition involves a rivalry among firms and is prevalent throughout our economy.

The Competitive Model The state of competition is the end result of the competitive process under certain conditions.

Factors Affecting the Form of Market Competition an Industry Expresses

Factors The number and size distribution of buyers and sellers The degree of product differentiation

Factors The extent of barriers to entry Amount of information available

Factor #1: The number and size distribution of buyers and sellers

Number and Size Distribution E.g. farmers and consumers 2 million farms in US 1.2 million are small with < $20,000 annual income

Number and Size Distribution Most farm’s output is so small, any one’s output, compared to total output, is imperceptible. What one farmer does has no influence on what any other farmer does.

Number and Size Distribution The same can be said for consumers. Marketplace has many consumers and the vast majority consume small amounts.

Factor #2: Product Differentiation

Product Differentiation A competitive market is characterized by undifferentiated or homogeneous products.

Product Differentiation Homogeneous or undifferentiated products cannot be distinguished from one another. E.g. No. 2 yellow corn

Product Differentiation If you feed livestock and have two different corn sellers you can buy from, how do you determine which to buy from?

Factor #3: Barriers to Entry

Barriers to Entry Barriers are things that prevent other firms from entering the market.

Barriers to Entry Economics of scale Absolute unit cost advantages Capital access cost

Barriers to Entry Government policy Patents Commodity programs Import controls

Factor #4: Perfect Knowledge and Information

Knowledge and Info In a perfectly competitive market, firms would have same access to new knowledge and information about market prices, quantities, and quality.

Profit Maximizing Entrepreneurial Firms For perfect competition to exist, firms must have a singular goal of profit maximization.

The Profit Motive and the Results of Competition The competitive firm’s demand curve

$ Quantity The competitive firm’s demand curve

$ MR = D = P Quantity PmPmPmPm The competitive firm’s demand curve

The optimal level of output for a competitive firm is determined where Marginal Revenue (MR) is equal to Marginal Cost (MC).

$ Quantity Optimal Output Level

$ MR = D Quantity P*P*P*P* Optimal Output Level

$ MC MR = D Quantity P*P*P*P* Optimal Output Level

$ MC MR = D Quantity Q*Q*Q*Q* P*P*P*P* Optimal Output Level

Average Total Cost (ATC) can be added to the graph to demonstrate the firm’s profit potential.

Average Total Cost The per unit cost of producing a specific good. The difference between ATC and product’s price equals the profit per unit of product.

$ Quantity Average Total Cost

ATC $ Quantity

Price - ATC = Profit per unit of output Note: Price > ATC indicates a profit

$ Quantity

$ MR = D = P = P Quantity P*P*P*P*

$ MC MR = D = P = P Quantity Q* P*P*P*P*

$ MC MR = D = P = P Quantity ATC P*P*P*P*

$ MC MR = D = P = P Quantity ATC Q*Q*Q*Q* P*P*P*P*

Profit $ MC MR = D = P = P Quantity ATC Q*Q*Q*Q* P*P*P*P*

Profit Price - ATC = Profit per unit of output Note: Price < ATC indicates a loss

Profit It is important to note that profit in a perfectly competitive market will lead to firms wanting to enter that market If enough firms enter, then the market supply curve will shift to the right.

$ or Price S D Quantity PePePePe QeQeQeQe

S D Quantity PePePePe QeQeQeQe S

Profit With the increase in Supply, price will be driven down. With the lower price, profits will be driven out.

$ Quantity

$ MR = D = P = P Quantity P*P*P*P*

$ MC MR = D = P = P Quantity P*P*P*P*

$ MC MR = D = P = P Quantity ATC P*P*P*P*

$ MC MR = D = P = P Quantity ATC Q*Q*Q*Q* P*P*P*P*

$ MC MR = D = P = P Quantity ATC Q*Q*Q*Q* P*P*P*P* Loss

$ or Price S D Quantity PePePePe QeQeQeQe

S D Quantity PePePePe QeQeQeQe S

Profit With the decrease in Supply, price will be driven up. With the higher price, the losses will be driven out.

Market Price and Quantity

What are the factors that generate the market price that firms use to make their production decisions?

The interaction of the Market Supply and Market Demand curves will determine the price consumers will pay and producers will receive.

Market Supply and Demand Relationship for a Competitive Market

$ or Price Quantity

D Quantity

S D Quantity

S D Quantity PePePePe QeQeQeQe

Specific Results of Competition Price takers Optimal output No product differentiation

Specific Results of Competition Market equilibrium Technological advancements Efficiency

Changes in Supply or Demand

An Increase in Supply

Note the supply curve shifts to the right. This lowers price and increases quantity supplied.

An Increase in Supply A decrease in supply would be represented by a shift of the supply curve to the left.

$ or Price Quantity

D Quantity

S D Quantity

S D Quantity P Q

S D Quantity P Q S1S1S1S1

S D Quantity P Q S1S1S1S1 P1P1P1P1 Q1Q1Q1Q1

Supply Shifters Input Costs Prices of Related Goods Technology Weather Number of Sellers Taxes Expectations

An Increase in Demand

$ or Price Quantity

D Quantity

S D Quantity

S D Quantity P Q

S D Quantity P Q D1D1D1D1

S D Quantity P Q D1D1D1D1 P1P1P1P1 Q1Q1Q1Q1

An Increase in Demand Note Demand Curve shifts right Increases price Increases quantity demanded

A Decrease in Demand Demand Curve would shift left Decreases price Decreases quantity demanded

Demand Shifters Income Population Tastes and Preferences Prices of Related Goods Expectations

Agriculture’s Competitive Side 2.1 mil farms Homogeneous products Freedom of entry and exit Information is available

Agriculture’s Departure from Competition Soviet grain deal of 1973 Marketing cooperatives High land prices Technology availability

Models of Imperfect Competition

Imperfect competition exists whenever a firm has some control over the price it charges for its product.

Forms of Competition PerfectCompetition Monopoly MonopolisticCompetition Oligopoly Imperfect Competition

Monopolistic Competition Many sellers in market Differentiated products Ease of entry or exit Information is readily available

Monopolistic Competition Non-price competition usually occurs

$ Quantity Monopolistic Competitor Demand Curve

$ Quantity D Monopolistic Competitor Demand Curve

Monopolistically Competitive Firm’s Price, Quantity, and Profit Short Run

$ Quantity Monopolistically Competitive SR

$ Quantity D Monopolistically Competitive SR

$ Quantity D MR Monopolistically Competitive SR

$ Quantity D MR MC Monopolistically Competitive SR

$ Quantity D MR MC ATC Monopolistically Competitive SR

$ Quantity D MR MC ATC Monopolistically Competitive SR

$ Quantity D MR MC ATC Monopolistically Competitive SR

$ Quantity D MR MC ATC Monopolistically Competitive SR

Monopolistically Competitive Firm’s Price, Quantity, and Profit Long Run

$ Quantity Monopolistically Competitive LR

$ Quantity D Monopolistically Competitive LR

$ Quantity D MR Monopolistically Competitive LR

$ Quantity D MR MC Monopolistically Competitive LR

$ Quantity D MR MC ATC Monopolistically Competitive LR

$ Quantity D MR MC ATC Monopolistically Competitive LR

Oligopoly A few large firms Products standardized or differentiated Difficult entry Knowledge not available to all firms

Oligopoly Industries Sugar Light bulbs Gas Steel Glass

Oligopoly Industries Autos Breakfast cereals Cigarette makers Soap Beer

Concentration Ratio A rough measure to gauge whether or not an industry is an oligopoly % of market the largest firms control Usually 4-8 firms

CR Example CR 4 = % of market the largest 4 firms control Malt beverage industry CR 4 = 90%

Pure Monopoly Only one seller in market Product totally differentiated No free entry or exit Imperfect information

Pure Monopoly Where a perfectly competitive firm is a price taker, the monopolist is a price searcher.

$ Quantity P*P*P*P* Monopolist’s Demand Curve

$ Quantity P*P*P*P* D Monopolist’s Demand Curve

Monopoly Price, Quantity, and Revenue Schedules

$ Quantity Monopoly

$ Quantity D Monopoly

$ Quantity D MR Monopoly

$ Quantity D MR MC Monopoly

$ Quantity D MR MC ATC Monopoly

$ Quantity D MR MC ATC Monopoly

Monopoly Revenue Schedule

The Growth of Firms Internal Growth External Growth

The Growth of Firms Horizontal Mergers Combinations of firms in the same industry Vertical Mergers Two or more firms in different production or marketing stages within the same industry. Conglomerate mergers Combinations of firms in unlike industries