Perfect

1
U.S. Economy
How close to Adam Smiths World?
No Competition
Pure Free Market
lt?
Perfect Competition
Monopolistic Competition
Monopoly
OLIGOPOLY
2
Oligopoly
Market Characteristics

• Few interdependent sellers
• --the top four firms in the industry make up 70
  of total sales
• difficult to enter or leave market

3
Oligopoly Examples

• Car makers
• Steel industry
• Aircraft manufacturing
• Oil industry
• Airlines
• Tobacco industry
• Beer industry
• Soda industry
• Home Improvement
• Music recording industry
• Textbook industry
• Wireless communications industry
• Aerospace industry

4

• The most rapidly expanding market structure in
  USA over last 20 years

Why?

• Because of Economies of Scale.

5
Economies of Scale

• Definition factors that cause a producers
  average cost per unit to fall as output rises

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Economies of Scale Example
1 car
100 cars
1000 cars
10,000 cars
100,000 cars
10 cars
Cost of building factory (fixed cost)
1 Billion
1 Billion
1 Billion
1 Billion
1 Billion
1 Billion
Cost per car produced
100,000,000
10,000,000
1,000,000
100,000
10,000
1,000,000,000
7
Supply Demand (Oligopoly)
Market Demand Supply Curves
Individual Firms Demand Curve
S
elastic
Market Price
inelastic
D
D
Oligopolists face a KINKED demand curve. --Above
market equilibrium, demand is elastic --Below
market equilibrium, demand is inelastic
8
Cartels
Inside the world of OPEC DeBeers
Price
S
D
Quantity
9
Cartels

• Cartel
• A group of firms acting in unison (colluding) to
  impact the price of their product
• Illegal in USA based on Anti-Trust Laws (legal in
  other countries)

10
How Cartels Affect Price

• They collude to control/restrict the supply of
  their product
• By keeping Supply low, they keep price
  artificially high

11
Worlds most famous CARTEL
Organization of the Petroleum Exporting
Countries (OPEC)

• OPECS Effect on Oil Market
• Controls 2/3rds of worlds oil reserves
• 45 of current world oil supply
• Can influence price by controlling supply of oil
• uses quotas for each country
• Does not set oil prices

12
Supply Where is the Oil?
13
OPEC video clips
14
Diamonds --what should determine their value?

• Diamonds were very rare until 1871
• But today, diamonds are less rare than other
  gemstones
• So why are they so expensive?
• DeBeers leads a cartel that controls the worlds
  diamond market

15
Film Clip

• 60 Minutes segment on DeBeers

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Graphing Supply Demand
---------------
P1
P1
---------------

• Demand is kept artificially high inelastic
  through advertising
• Supply is kept artificially low by DeBeers
• End Result High prices paid lower Quantity
  supplied

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(No Transcript)
18
Video clip from Fair Fight in the Marketplace

• Offender Archer Daniels Midland Co.
• (segment 2) 6 min. 24 sec.