Unit 6. Markets and competition

1
Unit 6. Markets and competition

• IES Lluís de Requesens (Molins de Rei)?
• Batxillerat Social
• Economics (CLIL) Innovació en Llengües
  Estrangeres
• Jordi Franch Parella

2
Competitive markets

• - Have the following characteristics
• 1) There are many buyers and sellers in the
  market
• 2) The sellers don't have a significant influence
  on the price (price-takers)?
• 3) Firms can freely enter or exit the market
• 4) The goods offered have the same basic
  characteristics

3
Competitive markets

• - Total Revenue Quantity x Price
• - Average revenue equals the price of the good
• - Marginal Revenue ?TR / ?q Price
• - Profit maximization Marginal Cost Price
• - Firms willenter or exit the market until profit
  is zero
• - In the long run, the price equals the minimum
  of the average total cost
• - It achieves allocative efficiency and
  productive efficiency

4
Competitive markets
5
Monopoly

• - The monopoly is a price maker (not taker)?
• - What is a monopoly?
• 1) A unique seller of a good or service?
• 2) A product that doesn't have close substitutes?
• 3) The true reason of a monopoly is the existence
  of barriers to entry (privileges granted by the
  government)?
• 4) A natural monopoly arises when there are
  important economies of scale

6
Monopoly
7
Monopoly

• - Monopoly maximizes profit when Marginal Revenue
  Marginal Cost (Price gt Marginal Cost)?
• - Marginal Revenue ? Price (when the monopoly
  drops the price to sell one unit more, the
  revenue received from previously sold units also
  decreases)?
• - Price of Monopoly gt Price of Perfect
  Competition, Quantity of Monopoly lt Quantity of
  Perfect Competition

8
Monopoly

• - Price discrimination is the practice of selling
  the same good at different prices to different
  customers (the costs of production are the same)
  --gt The seller grasps consumer benefit

9
Monopoly

• - A monopoly causes deadweight losses similar to
  the deadweight losses caused by taxes
• - A monopoly is neither allocative nor productive
  efficient
• - Policymakers can regulate prices, turn the
  monopoly a public firm and impose antitrust laws

10
Oligopoly and Monopolistic Competition

• - Oligopoly refers to a few sellers offering a
  similar product to the consumers
• - Examples crude oil, petrol, aeroplanes ...
• - Monopolistic competition refers to many sellers
  offering a similar but not identical product to
  the consumers
• - Examples restaurants, hairdressers ...

11
Oligopoly

• - The key point of oligopoly is the trade-off
  between cooperation and self-interest (firms are
  interdependent) collusion, cartel, cheating each
  other
• - Game Theory is the study of how people behave
  in different situations
• - Prisoner's Dilemma provides insight into the
  difficulty of maintaining cooperation firms fail
  to cooperate even when cooperation would make
  them better off

12
Monopolistic Competition

• - Monopolistic competition means many sellers,
  product highly differentiated (it leads to
  advertising and brand names), free entry and exit
• - Short-run profits encourage new firms to enter
  the market until profits disappear
• - Short-run losses make firms to exit the market
  until losses disappear
• - Firms will enter and exit until the profits are
  zero

13
Oligopoly and Monopolistic Competition (with
profits)?
14
Oligopoly and Monopolistic Competition (with
losses)?
15
Oligopoly and Monopolistic Competition (breaks
even)?