1. MARKET STRUCTURES Ec102 D - May 05, 2011

3. DETERMINANTS OF MARKET STRUCTURES Number of Firms Freedom of entry and exit Nature of the product – homogenous (identical), differentiated Control over supply/output Control over price

4. MARKETS Group of buyers and sellers Type of market structure influences how a firm behaves: Pricing Supply Barriers to Entry Efficiency Competition

5. PERFECTLY COMPETITIVE Many buyers and sellers Freedom of entry and exit Nature of the product – homogenous (identical) Control over supply/output – market Control over price – market

6. MANY BUYERS AND SELLERS Actions of any single buyer or seller has a negligible impact on the market price RESULT: Price takers Since each has negligible impact, each buyer and seller will just take/accept whatever the market price is

7. MANY BUYERS AND SELLERS Market for Starapples Ave price is P30 per kg If one seller sets its price at P40, buyers will not buy from that seller If s/he sets price at P20, other seller will intervene (kill her, kidding) No choice but to take P30 price

8. FREEDOM OF ENTRY AND EXIT If someone wants to start a firm, go If someone wants to leave, fine Because it is free, as long as it is profitable, many sellers will enter, many buyers will buy Results to negligible impact of each buyer or seller

9. HOMOGENOUS PRODUCTS Products are largely the same Since there are many firms with the same product and same price, buyers can easily transfer Since there are many buyers who want the same product, firms can ignore those who won’t take their price

10. OUTPUT/PRICE Determined by market forces of supply and demand Market demand and market supply in equilibrium Profit Max: P=AR=MR AR=TR/Q

11. OUTPUT/PRICE P=AR=MR AR=TR/Q If Q increases  TR = PQ OUTPUT effect – More Q, TR increases NO PRICE effect since they are price takers

12. PERFECTLY COMPETITIVE REVENUE

13. PERFECTLY COMPETITIVE Boys and girls on campus Same girls/boys If you don’t take it, someone will Mineral Water in SM Malls Movie Tickets in the same mall chain Classes with different profs

14. MONOPOLY Only 1 firm selling particular g/s Barriers to entry exists: firms cannot enter the market and compete Product has no close substitute Control of price: Monopolist

15. NO CLOSE SUBSTITUTES Demand tends to be inelastic If buyers do not like the price of the monopolist, they cannot buy it anywhere else Prime example: Meralco and electricity

16. BARRIERS TO ENTRY Resources: Key resource for prod’n owned by a single firm Gov’t regulation: gov’t gives a single firm exclusive right to produce g/s Prod’n process: Single firm can produce output at a lower cost than can a larger number of producers

17. BARRIERS TO ENTRY Resources: Key resource for prod’n owned by a single firm Example: Water Rarely happens Resources are owned by many people

18. BARRIERS TO ENTRY Gov’t regulation: gov’t gives a single firm exclusive right to produce g/s Sometimes political Patent and Copyright – lead to higher prices BUT encourages research and more productivity

19. MONOPOLY REVENUE

20. OUTPUT/PRICE MR < P As Q is increased, P must be decreased If Q increases  TR = PQ OUTPUT effect – More Q, TR increases PRICE effect – P falls, TR decreases Profit Max: MC=MR

21. MONOPOLY Princess Only producer of…princessness Buyers (suitors) have no other option Suar Can do everything No one can compete Meralco

22. MONOPOLISTIC COMPETITION Many buyers and sellers Freedom of entry and exit Differentiated Products – similar but not identical Example: Low Price Edition books Different Editions Control over supply/output – monopoly

23. MONOPOLISTIC COMPETITION Downward sloping demand curve Profit Max: MR=MC P>MC Same as monopoly P=AC Same as Perfectly Competitive

24. MONOPOLISTIC COMPETITION Differences from Perfectly Competitive Excess Capacity – producing below capacity because if Q is increased, P has to be decreased Mark up over Marginal Cost – P>MC because firm has market power

25. MONOPOLISTIC COMPETITION Boys and girls on campus Not really perfectly competitive Similarity – same gender But not identical – each unique Each has a monopoly of his/her traits Classes with different profs

26. OLIGOPOLY Many buyers and FEW sellers High barriers in entry and exit Products may/not be differentiated Price setter Interdependence among firms Cooperation Self-interest

27. OLIGOPOLY Collusion – an agreement among firms in a market about quantities to produce or prices to change Kim and Gabe last Friday Cartel – group of firms acting in unison Acts as a monopoly

28. OLIGOPOLY Mean Girls – HIGH barrier to entry Exam – producers have the bargaining chip Oil giants – Petron, Caltex, Shell Cannot collude explicitly But notice that when one increases its price, the rest follow

31. ACTIVITY #1 2 students same birthday Minus 2 in the Midterm Exam Grade Suspected of cheating If proven – 0 in the Midterm Exam Grade

32. ACTIVITY #1 Options: If one confesses and the other doesn’t The one who confessed will not get any deduction The one who doesn’t will get 0 If both confesses Both get only minus 5

33. THIS WEEK FRIDAY Quiz on Market Structures Price and Output Determination in Mon, MonCom, Oligopoly Market Failures PARTYIN PARTYIN YEAH FUN FUNFUN, LOOKIN’ FORWARD TO THE WEEKEND

34. DUE ON MONDAY Short paper on the film for Friday 1 full page (until bottom) Refer to syllabus for formatting Outline for your video presentation Concept Basic flow

35. GROUP QUIZ AMPC and the blue book market Market for autoload/e-load Turon market in the Ateneo Grades in Ec102 D class Market of all Ec102 classes in the Ateneo