1. The Economic Way of Thinking 10e ©Prentice Hall 2003 1 The Economic Way of Thinking 10 th Edition by Paul Heyne, Peter Boettke, and David Prychitko “Competition and Monopoly” PowerPoint Slides prepared by Assistant Professor Paul Harris Camden County College

2. The Economic Way of Thinking 10e ©Prentice Hall 2003 2 Chapter Outline I.Introduction II.Who Qualifies as a Monopolist? III.Alternatives, Elasticity, and Market Power IV.Privileges and Restrictions V.Price Takers and Price Searchers I.Introduction II.Who Qualifies as a Monopolist? III.Alternatives, Elasticity, and Market Power IV.Privileges and Restrictions V.Price Takers and Price Searchers

3. The Economic Way of Thinking 10e ©Prentice Hall 2003 3 Chapter Outline VI.Price Takers’ Markets and “Optimal” Resource allocation VII.Competition As a Process VIII.Once Over Lightly VI.Price Takers’ Markets and “Optimal” Resource allocation VII.Competition As a Process VIII.Once Over Lightly

4. The Economic Way of Thinking 10e ©Prentice Hall 2003 4 Introduction Reality Sellers set the majority of the prices. Buyers set most of the rest. A few are set by negotiations between buyers and sellers.

5. The Economic Way of Thinking 10e ©Prentice Hall 2003 5 Introduction Market transactions are an activity. Scarcity is a logical condition, not a material one. Making choices involves rationing and prioritizing. In our interactions with others we engage in competition.

6. The Economic Way of Thinking 10e ©Prentice Hall 2003 6 Who Qualifies as a Monopolist Monopoly One seller Question Was telephone service a good example prior to cellular phones? Answer No -- If phone service is broadly defined as “communication services”

7. The Economic Way of Thinking 10e ©Prentice Hall 2003 7 Who Qualifies as a Monopolist Monopoly One seller Question Was telephone service a good example prior to cellular phones? Answer No -- If phone service is broadly defined as “communication services” Question… Is there a substitute for Electricity?

8. The Economic Way of Thinking 10e ©Prentice Hall 2003 8 Who Qualifies as a Monopolist Question Is a grocer a monopolist? Answer Yes -- If their services are narrowly defined as a provider to people with no alternative source of groceries. The word “monopoly” is extraordinarily ambiguous. For everyone or no one is is a sole seller depending on how we define the commodity being sold.

9. The Economic Way of Thinking 10e ©Prentice Hall 2003 9 Who Qualifies as a Monopolist Question Is a grocer a monopolist? Answer Yes -- If their services are narrowly defined as a provider to people with no alternative source of groceries. The word “monopoly” is extraordinarily ambiguous. For everyone or no one is is a sole seller depending on how we define the commodity being sold. Market power is inversely related to elasticity of demand.

10. The Economic Way of Thinking 10e ©Prentice Hall 2003 10 Alternatives, Elasticity, and Market Power  Question  What problems result from a single seller?  Single sellers face no competition.  Buyers have no substitutes.  Can be taken advantage of more easily

11. The Economic Way of Thinking 10e ©Prentice Hall 2003 11 Alternatives, Elasticity, and Market Power Price Elasticity of demand helps explain how much control suppliers suppliers have over price.

12. The Economic Way of Thinking 10e ©Prentice Hall 2003 12 Alternatives, Elasticity, and Market Power P Q Does not exist

13. The Economic Way of Thinking 10e ©Prentice Hall 2003 13 Alternatives, Elasticity, and Market Power P Q Less than perfectly elastic demand

14. The Economic Way of Thinking 10e ©Prentice Hall 2003 14 Alternatives, Elasticity, and Market Power P Q Less elastic demand

15. The Economic Way of Thinking 10e ©Prentice Hall 2003 15 Alternatives, Elasticity, and Market Power  More substitutes--more elastic the demand  Market Power  A matter of degree  Inversely related to elasticity of demand

16. The Economic Way of Thinking 10e ©Prentice Hall 2003 16 Privileges and Restrictions Monopolies may result from acts of the state. Allow some to engage in an activity but not others Tax or restrict some sellers but not others Grant protection or assistance to some but not others

17. The Economic Way of Thinking 10e ©Prentice Hall 2003 17 Privileges and Restrictions Monopoly grants exist to provide: Public safety Fair competition Stability National security Efficiency Monopoly grants exist to provide: Public safety Fair competition Stability National security Efficiency

18. The Economic Way of Thinking 10e ©Prentice Hall 2003 18 Privileges and Restrictions QuestionsQuestions –Who benefits from these restrictions? –Any losers? Monopolist (a possible definition)Monopolist (a possible definition) –Any individual or organization operating with the advantage of special privileges granted by the government

19. The Economic Way of Thinking 10e ©Prentice Hall 2003 19 Privileges and Restrictions QuestionQuestion –What firms would be a monopolist using this definition? OligopoliesOligopolies –Few sellers QuestionsQuestions –Few sellers of what? –How do we define the commodity?

20. The Economic Way of Thinking 10e ©Prentice Hall 2003 20 Privileges and Restrictions QuestionQuestion –What firms would be a monopolist using this definition? OligopoliesOligopolies –Few sellers QuestionsQuestions –Few sellers of what? –How do we define the commodity? Question… Are US Auto Makers considered oligopolistic?

21. The Economic Way of Thinking 10e ©Prentice Hall 2003 21 Price Takers and Price Searchers Questions Does U.S. Steel establish the price for its product? Does a farmer establish the price for his/her product? Questions Does U.S. Steel establish the price for its product? Does a farmer establish the price for his/her product?

22. The Economic Way of Thinking 10e ©Prentice Hall 2003 22 Price Takers and Price Searchers QuestionQuestion –What would happen if a farmer tried to sell his produce above the current market price of $3.38 3/4? QuestionQuestion –What would happen if a farmer tried to sell his produce above the current market price of $3.38 3/4?

23. The Economic Way of Thinking 10e ©Prentice Hall 2003 23 Price Takers and Price Searchers P Q 3.48 3/4 3.50 3.46 Won’t sell any D Sell all he wants

24. The Economic Way of Thinking 10e ©Prentice Hall 2003 24 Price Takers and Price Searchers Question.. Will the market price be affected if a farmer refuses to sell his produce?

25. The Economic Way of Thinking 10e ©Prentice Hall 2003 25 Price Takers and Price Searchers The farmer is a price taker.The farmer is a price taker. –He cannot affect the price. –He can sell all he wants at the market price. –He will not sell any at a price above the market price.

26. The Economic Way of Thinking 10e ©Prentice Hall 2003 26 Price Takers and Price Searchers Normal Seller Sells more at a lower price Sells less at a higher price These firms are price searchers. They search for the price that is most advantageous to them. They have some market power. Inversely related to elasticity of demand

27. The Economic Way of Thinking 10e ©Prentice Hall 2003 27 Price Takers and Price Searchers P Q Demand curves faced by price searchers

28. The Economic Way of Thinking 10e ©Prentice Hall 2003 28 Price Takers Markets and “Optimal” Resource Allocation QuestionsQuestions –Are monopolists price searchers? –Do they face competition?

29. The Economic Way of Thinking 10e ©Prentice Hall 2003 29 Price Takers Markets and “Optimal” Resource Allocation ScenarioScenario –Let’s look at the demand and supply curves for house painters during a summer. –This will be used to illustrate the advantages of the price takers assumption.

30. The Economic Way of Thinking 10e ©Prentice Hall 2003 30 Price Takers Markets and “Optimal” Resource Allocation Remember Supply curves are marginal cost curves. Marginal cost curves for any individual will slope upward to the right.

31. The Economic Way of Thinking 10e ©Prentice Hall 2003 31 Price Takers Markets and “Optimal” Resource Allocation Price per Hour Thousands of Hours of House Painting 01234567811109 0 2 4 6 8 12 14 16 18 20 22 24 D S= MC Sometimes called the “optimal allocation of resources”

32. The Economic Way of Thinking 10e ©Prentice Hall 2003 32 Price Takers Markets and “Optimal” Resource Allocation ScenarioScenario –Suppose a legislative body raises the minimum wage to $10/hour.

33. The Economic Way of Thinking 10e ©Prentice Hall 2003 33 Gain from trade foregone Price Takers Markets and “Optimal” Resource Allocation Price per Hour Thousands of Hours of House Painting 01234567811109 0 2 4 6 8 12 14 16 18 20 22 24 D S= MC

34. The Economic Way of Thinking 10e ©Prentice Hall 2003 34 Price Takers Markets and “Optimal” Resource Allocation Prices fixed above marginal cost rule out some mutually advantageous exchange opportunities.

35. The Economic Way of Thinking 10e ©Prentice Hall 2003 35 Price Takers Markets and “Optimal” Resource Allocation In a price takers’ market:In a price takers’ market: –No seller can set and keep price above marginal cost. In a price searchers’ market:In a price searchers’ market: –They can do so.

36. The Economic Way of Thinking 10e ©Prentice Hall 2003 36 Competition as a Process  In economics competition means a state of affairs.  A competitive market is said to exist when… There are a large number of buyers and sellers, and nobody possesses market power. There are a large number of buyers and sellers, and nobody possesses market power. Market participants possess full and complete information of alternatives Market participants possess full and complete information of alternatives Sellers produce a homogenous product. Sellers produce a homogenous product. There is costless mobility of resources. There is costless mobility of resources. The economic actors are price takers The economic actors are price takers

37. The Economic Way of Thinking 10e ©Prentice Hall 2003 37 Once Over Lightly Monopoly means one seller.Monopoly means one seller. Narrowly defined every seller is a monopolist.Narrowly defined every seller is a monopolist. The word monopoly is ambiguous.The word monopoly is ambiguous. No seller has unlimited power over buyers.No seller has unlimited power over buyers. Elasticity of demand reflects the number of substitutes.Elasticity of demand reflects the number of substitutes.

38. The Economic Way of Thinking 10e ©Prentice Hall 2003 38 The more substitutes a product has the more elastic the demand for a product.The more substitutes a product has the more elastic the demand for a product. Some companies are granted special privileges that restrict their competition.Some companies are granted special privileges that restrict their competition. Competition makes some sellers price takers, while others with less competition are price searchers.Competition makes some sellers price takers, while others with less competition are price searchers. Once Over Lightly

39. End of Chapter 9 Next Chapter 10, “Price Searching”