View
34
Download
0
Category
Tags:
Preview:
DESCRIPTION
A.S 3.1. Understand Marginal analysis and the behaviour of firms. SLO: Describe characteristics of a perfectly competitive firm. Derive the demand curve for a perfectly competitive firm given market demand and supply. Calculate Total, Average and Marginal Revenue for firms. - PowerPoint PPT Presentation
Citation preview
SLO: Describe characteristics of a perfectly competitive firm.
Derive the demand curve for a perfectly competitive firm given market demand and supply.
Calculate Total, Average and Marginal Revenue for firms.
A Perfectly Competitive Market Has the following characteristics
Large number of buyers and sellers (firms) Firms have no market power and are price takers
Each firm supplies a small amount of the overall market supply
Firms cannot influence the market price by altering its output.
Only able to sell their good at the price determined in the market
Output is homogenous Product is identical to that produced by other firms
Resources are perfectly mobile Buyers and firms have perfect knowledge of the market
No Barriers to entry or exit from the market
Perfect Competition Market garden
Uses simple resources Land, seeds, water,
fertiliser, equipment and labour
Price determined by the market
What will happen to the price if demand increases?
What may happen to the price if the growing conditions have been favourable?
NZ examples?
-Dairy farming
-Wool growing
-Fishing
Perfect Competition Deriving the demand curve
60
50
40
30
20
10
0
60
50
40
30
20
10
0
Pri
ce
Pri
ce
1 2 3 4 5 6 10 20 30 40 50 60Quantity (million)
Output (000)
S
D
P
Q
D
Market Demand curve for the perfectly competitive firm
Because the perfectly competitive firm is a price-taker it faces a horizontal demand curve. The price is determined by demand and supply in the market.
Oligopoly Has the following characteristics
Few number of large sellers, that dominate the market Sells similar but differentiated products. Price is usually similar across the industry Firms have some control over price Firms prefer to use non-price competition to provide a
competitive advantage Strong barriers to entry by new firms Often accused of collusion, as existing firms look as
though they act together in their pricing decisions.
Oligopoly: Example Petrol retailing companies
Few large competitors BP SHELL Caltex Mobil
Smaller players Challenge Gull
Sell a homogeneous product. These firms differentiate their product with powerful branding using heavy advertising logos sponsorship and other promotions
Other Examples
•New car market
-Ford, Mitsubishi, Toyota, Honda
•Fast Food market
- McDonalds, KFC, Burger King
•Retail banking market
- BNZ, ANZ, Kiwibank, Westpac
Kinked Demand Curve
p
q
q1 q2 q3
If producer reduces price (from P2 to P3) the competitors are likely to follow. The result is a smaller % increase in sales from q2 to q3. (inelastic demand).
If producer increases price (P2 to P1) the competitors are unlikely to follow. The result is a larger % fall in sales from q2 to q1 (elastic demand)
d
P1
P2
P3
The risk of using Price Competition A price war may arise ( firms keep lowering
prices to try and gain a greater market share.
This may result in a firm or firms being unable to operate and might be forced to leave the market altogether. While the firms that survived, will have to settle for decreased profits (as prices are lower) until the price war is over.
Due to this risk, Oligopolists prefer not to use
price competition and stick to using non-price competition.
Non-Price Competition
Product Differentiation
Make the product appear different
Product Variation
Make the product really different
Duopoly
Has the following characteristicsMarket is dominated by two large producersHave considerable influence on priceProduce differentiated products, with the use
of non-price competitionStrong barriers to entry of new firms
Duopoly Examples
Mobile firm services Telecom and Vodaphone (one company owns 2
degrees)
Domestic airlines in NZ Quantas NZ and Air NZ
Supermarkets Foodstuffs ( New World, Pak’ n’ Save) Woolworths Australia (Woolworths, Foodtown,
Countdown)
•Qantas Airways Limited is the national airline of Australia. The name was originally "QANTAS", an acronym/initialism for "Queensland and Northern Territory Aerial Services". Nicknamed "The Flying Kangaroo", the airline is based in Sydney, with its main hub at Sydney Airport.
Monopoly
Has the following characteristicsOne firm known as a monopolistOne firm supplies the whole market or nearly
the whole market- has considerable influence on the price by varying quantity it supplies
Very strong barriers to entry and exit The product it sells has only one or no close
substitutes
Monopsony
Is the sole BUYER in a market
The market is dominated by one large firm that purchases the whole market supply or nearly the whole market
Able to have significant influence on
the price by varying the quantity it
purchases
Example: Fonterra
Recommended