WEEK 3 - Imperfect Competition, Economic Surplus, and Social Welfare Flashcards
What is an monoply/impure monoply?
A monopoly is when there is no other competitors such as a flower shop in rural Western Australia or Standard oil USA
A form of no compition is called a pure monopolies however they are rare.
Coca cola has a monopoly on coca cola drinks but faces competition from Pepsi in the cola-flavoured soda drinks
Imperfect compition:
Is what economists refer to as the in-between a monopoly and equal competition.
What is in an imperfect compition:
1. Suppliers (or consumers) have market power
2. Firms may supply heterogeneous (differentiated) goods
3. There may be barriers to entry
Examples and types of imperfect compition:
Oligopoly: A market with a few large sellers
- Examples Coca Cola and Pepis, Woolworths and coles
Heavily impacted by compition decisions
Monopolistic competition: Market with many small business competing, often with slightly different products
- Example a Pizza ship and a neighbouring burger joint in a small town
Perfect compition and monoply impact on a demand cruve
Monopolist’s demand curve is simply the market demand curve because the monopolist is the only firm in the market
- A monopoly controls the quality and price but can’t control the demand curve (can’t sell an infinite amount of product)
A perfectly competitive firm faces a demand curve that is a horizontal line equal to the market price because if it charges even one cent more, it will lose all its customers.
In an imperfect compition where do firm fall
In a imperfect compitiion market firms fall on the continiuum between price-takers and monoplist
- With variation determined by how easy a consumer can switch to a close substitute
How firm use their market power
Most firms have market power, as there decision often impact the market either through price gouging (to limit new competition) or by differentiating their product
NOTE: More market power translates into greater and more inelastic demand for your product, giving you a greater ability to raise prices without seeing a large fall in sales.
- Monoplies are price setters
The effects of marginal cost and revenue on production.
Monopoly or perfectly competitive firm will continue to produce if MR (Marginal revenue) exceeds MC (Marginal cost)
- In a perfectly competitive market the MR is the market price
Welfare economic
Welfare economic is the measurement of social and environmental cost of their decisions
- Often accounted for in Normative decisions
NOTE: Often ignored when trying to maximise economic surplus as it only focuses on output not the methods of output
Economic surplus:
Economic surplus: is the total benefits minus total costs flowing from an activity.
- Created by the difference between marginal benefit and marginal cost to society
* Used by economist to measure economic efficiency
* More surplus means more economically efficient
* Measured using a monetary value
Broken down into Consumer surplus and Producer surplus:
Consumer surplus:
Consumer surplus: is the difference between what a buyer was willing to pay for something and the price they actually pay.
For example, if a consumer is buying a gift for a friend, the consumer surplus generated by the purchase is a measure of the benefit they get from seeing their friend happy minus the benefit they would have received from spending the money on something else.
Producer surplus:
Producer surplus: is the difference between the price a seller receives for something and the marginal cost of producing it.
Efficient quantity:
Efficient quantity: is the amount that produces the largest possible economic surplus
- A perfectly competitive market will produce the largest possible economic surplus
Conditions to identify a perfect compition market:
- Both buyers and sellers are price takers.
- Sellers produce homogeneous (identical) goods.
- There is free entry and exit in the market (in the long run).
NOTE: If any of these conditions are violated then its a imperfect competition
For a equilibrium to be effiecet it must fullfill two conditions
- There are no externalities.
- Externalities are costs (negative) or benefits (postive) imposed on bystanders whose interests are not taken into account by market participants. - There is full information.
- Private information often undermines the efficency of the market, blocking potential trades often refered to as “market for lemons” model
Thus all must be in the economy voluntarily and trade will only happen if everyone benefits
- Often not the case
Types of Externalities:
Externalities: are costs (negative) or benefits (postive) imposed on bystanders whose interests are not taken into account by market participants.
Externalities can be both postive and negative.
Postive:
Positive externalities is getting the flu vaccine as you help with herd immunity
Negative:
Negative externalities is the burning of petrol which reduces air quality and increase greenhouse gas emissions.
Factors that impact the shift in demand curve:
- Income
- Preferences
- Prices of related goods
- Expectations
- Congestion and network effects
- The type and number of buyers
NOTE: An external change in price doesn’t affect demand or supply curves
Factors that shift the supply curve:
- Input prices
- Productivity and technology
- Prices of related outputs
- Expectations
- The type and number of sellers
NOTE: An external change in price doesn’t affect demand or supply curves
Why do we have markets:
Markets determine:
1. Who makes what?
2. Who gets what
3. How much of something gets bought and sold
Economic surplus and its impact on the markets:
If supply reaches price/demand at the equilibrium then all sales are realised
IF:
*Less then equilibrium then unrealised gains resulting in the marginal benefit to a buyer is greater than the marginal cost to a seller
*More than the equilibrium point is sold then it reduces total surplus esulting in the marginal cost to the seller is greater than the marginal benefit to the buyers
Additional facts about the market:
Those who sell the least of their product are those with lowest marginal cost
- This taking into account opportunity cost as well
Buyers who buy the most expensive coffee are those with the highest marginal benefit
- I.e they value coffee the most
Sellers opportunity cost includes surplus they could earn in another market
- If demand increases, firms shift resources from other markets
Markets require little coordinates - as buyers and sellers willingly engage in trade
- Market price conveys all the information for optimal decisions
Limitation of the market:
Problems with economic surplus:
1. Efficient allocations may not be equitable
2. Willingness to pay reflects ability to pay
3. Economics surplus measures outcomes, not how they are achieved (welfare economics)
Maximising the ‘economic pie’ doesn’t shift benefits distributed equally
In oligopoy prices are higher then marginal cost thus results in unrealised gains
How government/markets face the limitations of the market:
To prevent monoplies government instills laws/rules such as:
1. Property rights e.g contract law
2. Law that facilitate transparency of information e.g consumer protection laws
3. Market regulation e.g environmental laws
Failures of the market or government can lead to exploitation and thus increase profit for shareholders.
