A Look At Three Types Of Price Searchers Economics Essay

A Look At Three Types Of Price Searchers Economics screenA monopoly is a family producing a commodity for which there is no close substitute. There argon usually some forms of barriers of origination. It is difficult to define a pure monopoly as close substitutes are difficult to define. For example, there are no close substitutes for cigarettes, exclusively there are many substitutes for Marlboro.1.1 Characteristics Features(a) Only whiz trafficker.(b) Restricted entry by barriers.(c) Market information is not free and holy. Barriers to entry(a) Legal barriers create legal monopolies.(i) Public franchise exclusive estimable to turn over a business, e.g. TVB.(ii) Government licence exclusive right to entry into a business, e.g. taxi licence.(iii) Patent exclusive right to physical exertion an invention, e.g. right to give a drug.(b) Natural barriers create natural monopolies.(i) The average cost falls over a large volume of widening before it chuck outs. LRAC would be decline if an industry were under monopoly than if it was assignd mingled with 2 or more competitors.(ii) Control the run of an essential raw material, e.g. most diamond mines in the earth are controlled by De Beers Ltd.(iii) Economies of scale The large fixed cost of intersectionion requires a large output to pull down the average cost, e.g. electricity generated by China Light Power Ltd.1.2 Output And Price DecisionsDefinitionA unmarried- toll monopoly is one that charges the same harm for every unit of output it sells.The monopoly must sink how much to realise and what legal injury to charge. It is a legal injury-searcher.DefinitionA charge searcher is a seller with sufficient grocery store power to set its set by adjusting supply.Since there is only one bulletproof in the industry, the penury bow of the true is also the make curve of the industry, and the seller faces a downwardly sloping demand curve.Table 1 illustrates the demand function of a petrol stati on. The marginal receipts is less than and falls faster than the worth charged. The price is also equal to average revenue enhancement (AR).Table 1 Demand and marginal revenuePrice (P,$/Litre)QuantityDemanded (Q)Total Revenue(TR = P x Q, $) fringy Revenue(MR = TR = Q)($/ duplication Litre)180016116161422812123368104404The monopoly exploits its profit by producing the take aim of output to MR = MC.Given the total cost as in Table 2, we erect find that the best output level to maximise profit is at three litres, where both MC and MR are equal. The price charged is $12.Table 2 Demand and marginal costPrice (P,$/Litre)QuantityDemanded (Q)TotalRevenue(TR=P x Q, $)Marginal revenue(MR = TR / Q,$/Extra Litre)Total Cost(TC, $)Marginal Cost($/Extra Liter)180015161161618314228122241233683081044044111Graphically, the same conclusion whoremonger be derived in assure 1.Figure 1 A monopolys output and priceThe price is determined by demand curve corresponding to the offset bar at which t he MR equals to MC. The profit or loss is again determined by the ATC with honorable mention to the quantity sold and the price charged.owe to barriers to entry, economic profits go out not be eliminated away in the prospicient run. The only difference between short-run and long-run equilibrium is that in the long run, the buckram entrust produce where MR = LRMC.1.3 Single-price Monopoly Versus Perfect CompetitionA monopoly and perfect tilt are two completely different food market structures leading to different price and output decisions. We can summarise their differences as followsPerfect CompetitionMonopoly Price-taker Monopoly influences its price Produce where MR = MC Produce where MR = MC P = MR = MC P MC P MR No barriers to entry Restricts output, charges a higher priceIn terms of output, a monopoly is always accused of restricting output in order to compel the price above the marginal cost. This is known as allocative inefficiency, leading to loss in social welfar e.In Figure 2, PM and QM are the price and output decisions of a monopoly, which are less than the corresponding output and price decisions in perfect disputation. We can see that the PC and PM for perfect competition are set at P = AR = MR = MC.Figure 2 Price and output decisions in a monopoly and in perfect competitionSimilarly, the output level is reduced from QC to QM, which will hurt both consumers and producers in terms of loss in consumer surplus and producer surplus. The sum of such loss is known as deadweight loss.DefinitionA deadweight loss is a loss to society that cannot be recovered.Figure 3 Inefficiency of a monopolyIn Figure 3, some of the losses of consumers have been captured by the producer as monopoly gain. However, there is still deadweight loss as illustrated by the area of the triangle. In this respect, a monopoly reduces the potential gain to society in term of social welfare.1.4 Shortcomings Of A MonopolyA monopoly has the by-line shortcomings Higher price and get down output than under perfect competition in both short run and long run. Possibility of higher cost repayable to lack of competition. anisometric distribution of income as income concentrates on monopolies. Lack of incentive in invention and innovation.1.5 Advantages Of A MonopolyA monopoly has the following advantages Economies of scale. Possibility of lower cost curve due to more research and development and more incentives. Innovation and new harvest-times.2. Monopolistic CompetitionThe second graphic symbol of price-searcher is noncompetitive competition.DefinitionMonopolistic competition consists of feature articles of perfect competition and monopoly. A steadfastly in such a market structure is also referred to as open market price-searcher as it is not protected by barriers.2.1 Characteristics Large number of sellers(a) Each firm has a small market share.(b) This implies independence of firms. Freedom of entry Product differentiationEach firm has some marke t power over its loyal customer. Each sellers product is a close substitute for many other sellers products(a) Products are made slightly different from others, i.e. differentiation.DefinitionIn differentiation, products are made slightly different from others by brand, packaging, sales location and services.(b) Non-price competition is common.2.2 Demand CurveBecause of product differentiation, a firm can raise its price without losing all its customers.Therefore, the demand curve is downward sloping because a price rise results in the loss of some, but not all customers.The demand curve is relatively elastic because of substitutes from other firms. However, the actual elasticity depends on the degree of product differentiation. Generally, the less differentiated the product is, the more elastic the demand will be, and vice versa.2.3 Price And Output Determination2.3.1 Short runA firm in monopolistic competition faces a downward sloping demand curve. The marginal revenue (MR) curve of the firm in monopolistic competition is downward sloping. The profit is maximised where marginal revenue equals marginal cost.The profit-maximizing output level is determined by the intersection of MR and MC curves. The profit-maximising price is determined by the demand curve.The firm can make a normal profit, an economic profit or a loss, depending on the difference between the price and the average total cost. Since each firm is small and has market power, no single firm can effectively influence what other firms do. If one firm changes its price, this action has no effect on the actions of the other firms.Figure 4 Monopolistic competition in the short run2.3.2 Long runEconomic profits in the short run will attract new entrants. When new firms enter, they share the market demand. The existing firms demand curve shifts inwards, representing less demand. This process continues until all economic profits are exhausted.When only normal profits remain, there is no incentive for n ew entrants. In Figure 5, the price and quantity are $140 and 60 units respectively. As the price is just equal to ATC, there is no economic profit.Figure 5 Monopolistic competition in the long runThe long-run equilibrium will be a position where the downward sloping demand curve is tangent to the LRAC curve. However, the demand curve will never be tangent to the bottom of LRAC because it is downward sloping. The profit-maximising output is 60 units and price is $140.The firm in monopolistic competition has excess talent as it does not produce at the optimum level of output where the LRAC is the lowest.Figure 6 Excess capacity in monopolistic competition2.4 ShortcomingsMonopolistic competition has the following disadvantages Owing to monopoly power, long-run equilibrium brings a higher price and lower output than perfect competition. Owing to downward sloping demand curve, the firms demand curve will never be tangent to the bottom of the LRAC curve, implying that it will not produ ce at the least-cost point. Therefore, product differentiation in monopolistic competition creates excess capacity (i.e. creates inefficiency). Less scope for economies of scale as share among many sellers. Lack of economic profits in the long run for research and development.2.5 AdvantagesMonopolistic competition has the following advantages Demand curve is highly elastic due to the large number of substitutes. Diversity of products is available. (However, it has been argued that the cost of diversity is excess capacity which is a type of inefficiency.) Greater freedom of entry when compared with monopoly. Absence of economic profits in the long run helps to keep prices down for consumers.3. OligopolyDefinitionAn oligopoly occurs when only a few firms share a large proportion of the industry.3.1 Characteristics Few number of sellersCompetition among a few, e.g. two to 20. Products may be identical or differentiated Barriers to entryEntry may be relatively difficult or impossible (e .g. petroleum). Interdependence of firmsOligopolists react to the pricing policy of rivals.The outcome is that there is no single generally accepted theory of oligopoly. Firms may react differently and unpredictably. A firms policy will depend on how it thinks its competitors will react to its move and the answer depends on how its competitors really react.3.2 Collusion And CompetitionThe interdependence of firms in an oligopoly drives firms into one of the following two incompatible policies Collusive oligopoly Oligopolists have formal or understood agreement to limit competition among themselves to reduce uncertainty. For example, they may set output quotas, fix prices and limit product promotion. The typical collusive oligopoly is a cartel price drawing cardship. Non-collusive oligopoly There is no formal agreement among oligopolists. Firms compete for bigger shares of industry profits.3.3 Collusive OligopolyA typical collusive oligopoly has these features CartelFirms acts like a monopoly to maximise industry profits.(a) Cartel by non-price competition Market price is set by joint profit maximisation and each firm observes that price. However, they compete for customers in the form of non-price competition.(b) Cartel by quotas Another way is to set the price by joint profit maximisation. Each firm observes that price, but each firm will take its share or quota of the total quantity demanded at the controlled price.Thus, both cases require adherence to the price-setting by joint profit-maximisation among oligopolists. The only difference is whether the quantity demanded at the controlled price is competed among the firms in the form of non-price competition or is divided among themselves in the form of quotas. Price leadershipThe demand curve of price leader represents the market share of the leader. The leader first maximises its profits at the point where leaders MC = MR. The corresponding price of leaders demand curve becomes the market price which ever y other firm has to follow. The leader supplies at its equilibrium quantity and the followers supply the rest representing the difference between market demand and leaders supply.3.4 Kinked Demand Curve ModelThere are many theories to explain different kinds of phenomena in oligopoly. One such theory, the kinked demand curve, is put frontwards by Paul M. Sweezy to explain the price rigidity or sticky price in an oligopoly industry.Assumptions If a firm raises its price, others will not follow. Thus, the demand curve will be more elastic in this range. If a firm cuts its price, so will the other firms. The demand curve in this range will be less elastic.These assumptions result in the kinked demand curve.In Figure 7, because the demand curve has kinked, the MR has broken as is illustrated by the gap between a and b on the graph. And the output and price would be the same even though the MC rises due to the same level by the equality of MR and MC.Thus, the price will be sticky when t he cost increases within a certain range.Figure 7 The kinked demand curve3.5 ShortcomingsAn oligopoly has the following disadvantages Shares all the same disadvantages of monopoly, as discussed earlier in this chapter. Less scope for economies of scale than monopoly. More extensive advertising than monopoly, e.g. non-price competition.3.6 AdvantagesAn oligopoly has the following advantages Economic profits returns for research and development. Incentive for innovation for capturing large market share. Greater choice non-price competition through product differentiation.4. FACTOR MARKETFor the production of goods and services, a firm has to acquire factors of production. The markets for factors of production are standardised to those of the product market, as they can be categorised into perfect or imperfect markets.The demand for a factor of production is dependent upon the demand of goods that use the factor. Hence, the demand for factors of production is a derived demand.Definit ionDerived demand is demand for a productive resource that results from the demand for the goods and services produced by the resource.Figure 8 congressman of the factor and product marketsFactor payment is the income for the owner of the factor of production for use of the factor over a period of time. The factor income for fatigue, land, capital and entrepreneurship are wages, rent, interest and normal profit respectively.In a perfectly competitive factor market, the factor payment is determined by the forces of demand and supply.Figure 9 Demand and supply in the factor market5. MARGINAL PRODUCTIVITY THEORYThis theory explains that the demand for a factor depends on the marginal revenue product (MRP) of the factor.DefinitionMarginal revenue product (MRP) is the supernumerary sales revenue resulting from employing an additional worker.Marginal product (MP) is the extra output produced by the additional worker. The MP curve is downward sloping because of the law of diminishing re turns.MRP = MP (factor) x MR (goods)The MRP curve is downward sloping from left to right. It is identical in reach to the MP curve because MR (i.e. price of a good) is constant under perfect competition in the product market.Figure 10 Marginal product for labour and marginal revenue product6. DEMAND FOR A FACTORMarginal cost (MC) is the extra cost of employing an additional unit of factor of production. In a perfectly competitive factor market, a firms MC graph for a factor is horizontal because the firm is facing a perfectly elastic supply of the factor.Therefore, MC = Price of the factor (i.e. MC of labour = Wages)6.1 Profit MaximisationThe firm maximises profits whenMarginal cost of hiring an extra unit of labour = Marginal revenue from the labours output to the firmIn equilibrium, MC (labour) / Wages (factor price) = MRPHence, the firms demand curve for labour is identical to its MRP curve.Figure 11 Demand for labourThe market demand curve for labour is the sum of quantities of labour demanded by all firms at each wage rate.Chapter Review A monopoly is a price-searcher who is a seller with sufficient market power to set hisprice by adjusting supply. The monopoly maximises its profit by producing the level of output to MR = MC. A monopoly restricts output in order to push price above the marginal cost. Such allocative inefficiency leads to a loss in social welfare. Because of product differentiation, a firm in monopolistic competition can raise its price without losing all its customers. The firm in monopolistic competition has excess capacity as it does not produce at the optimum level of output where the LRAC is the lowest. Due to the interdependence of firms, oligopolists react to the pricing policy of their rivals. The kinked demand curve explains that the price will be sticky when thecost increases within a certain range. A firm will maximise profits when the marginal cost of hiring an extra unit of labour = the marginal revenue from the labours outpu t to the firmWhat You Need To Know Monopoly A firm producing a commodity for which there is no close substitute. Deadweight loss Loss to society that cannot be recovered. Single-price monopoly Monopoly that charges the same price for every unit of output it sells. Monopolistic competition This market structure consists of features of perfect competition and monopoly. Differentiation Products are made slightly different from others by brand, packaging, sales location and services. Oligopoly Only a few firms share a large proportion of the industry. Derived demand Demand for a productive resource that results from the demand for the goods and services produced by the resource.Work Them Out1. Which of the following is NOT a characteristic of a monopoly?A The monopolist faces an inelastic demand for its productB There is only one seller in the marketC Barriers of entry existD The monopolist can influence the price2. Which of the following statements is NOT true?A As an oligopolist respo nds to competitors actions, it can be considered a perfectly competitive firm.B Products in an oligopoly may be differentiated.C A cartel is like a monopolist with power to maximise industry profit.D Oligopoly is a market structure favourable to collusion.3. The characteristic of a monopoly isA its large scale of productionB the existence of barriers to entryC the huge initial investmentD the necessity for a large market4. A natural monopoly exists whenA a franchise is granted to a firmB economies of scale are necessaryC a firm can prevent the entry of competitorsD a firm specialises in natural resources extraction5. The monopolist can make economic profits becauseA entry is preventedB it charges a high product priceC it has low promotion costsD it has a large market share6. Economic profits earned by a monopolist are most likely due toA barriers of entryB an unexpected rise in the price of its productC good luckD the rate of return allowed by the government7. Which of the following is NOT a feature of oligopoly?A Only a few firms dominate the industry.B There are no barriers to entry into the industry.C The product may be either homogeneous or differentiated.D Firms in an oligopoly face downward-sloping demand curves.8. Which of the following is NOT a characteristic of monopolistic competition?A A single price exists for similar goods.B Only normal profit exists in the long run.C Products are differentiated.D Excess capacity exists in the long run.9. Which of the following statements is NOT true?A There are numerous sellers in perfect competition.B Products are differentiated in monopolistic competition.C Firms in perfect competition maximise profits.D Information is perfect in monopolistic competition.10. What is the likely market structure of coffee shops in Hong Kong?A MonopolyB OligopolyC Monopolistic competitionD Perfect competitionSHORT QUESTIONSWhat factor(s) enable(s) a monopoly to earn economic profits in the long run?Why do perfectly competitive fi rms maximise their profits by producing so that their marginal cost equals the price, but monopolists maximise their profits by setting a price that is greater than marginal costs?What are the characteristics of a market that allows a monopolist to successfully price discriminate between groups?Explain how a firm in an oligopoly can differentiate its product.ESSAY QUESTIONS1. Peters Toy Factory, a single-price monopoly, has the following demand schedule and total cost for sumptuosity toysQuantity (Toys)Price ($/Toy)Total Cost ($)0101183267341342215031Calculate Peters total revenue schedule.Calculate Peters marginal revenue schedule.Calculate Peters profit-maximising levels of (i) output(ii) price(iii) marginal cost(iv) marginal revenue(v) profit2. Mr Ma started a recycling business in Hong Kong this month. He employs students to sort and call for bottles, paying 10 cents for each bottle collected. The students can sort the following number of bottles in an mo.Number Of StudentsNu mber Of Bottles12002450375041,15051,45061,70071,90082,05092,150(a) Why does the students marginal product decline?(b) If all other firms pay the students $25 an hour to collect bottles, how many students will Mr Ma hire?If the fee for each collected bottle rises to 12.5 cents and the students wages increases to $37.50 an hour,(c) Calculate and show the changes to the students marginal revenue product in a table.(d) How many students will Mr Ma hire?