Chapter 9 - Market Equilibrium and Market Demand Imperfect...

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Market Equilibrium and Market Demand: Imperfect Competition Chapter 9
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Discussion Topics Market structure characteristics Monopolistic competition in selling Oligopolies in selling Monopolies in selling Implications for consumer and producer surplus
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Market Structure Characteristics Number of firms and size distribution Product differentiation Barriers to entry Picture here tells a tale of two markets (no. 2 yellow corn vs. farm equipment) Pages 177-178
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Perfect Competition Up to now we have been assuming the firm and market reflect the conditions of perfect competition … farmers come close as anybody to meeting these conditions. A large number of small firms (2 million farms) A homogeneous product (no. 2 yellow corn) Freely mobile resources (no barriers to entry caused by patents, etc. or barriers to exit) Perfect knowledge of market conditions (quality outlook information from government and university sources)
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Merging Demand and Supply Price Quantity D S P E Q E Chapters 6-7 Chapters 3-5 Chapter 8
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Firm is a “Price Taker” Under Perfect Competition Price Quantity D S P E Q E Price O MAX AVC MC The Market The Firm
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If Demand Increases…… Price Quantity D S P E Q E Price AVC MC The Market The Firm 10 11 D 1
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If Demand Decreases…… Price Quantity D S P E Q E Price AVC MC The Market The Firm 9 10 D 2
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Firm is a “Price Taker” in the Input Market Price Quantity D S P E Q E Price L MAX MVP MIC Labor Market The Firm
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Firm is a “Price Taker” in the Input Market Price Quantity D S P E Q E Price L MAX MVP MIC The Firm Fertilizer Market
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Imperfect Competition Many of the markets in which farmers buy inputs and sell their products however do not meet these conditions This chapter initially focuses on specific types of imperfect competitors in the farm input market, where firms are capable of setting the prices farmers must pay for specific inputs to their production.
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Imperfect Competition in Selling
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Unlike perfect competitors who face a perfectly elastic demand curve, imperfect competitors selling a differentiated product benefit from a downward sloping demand Curve (see Table 9.1 for both curves) (see Table 9.1 for both curves) Page 182
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Page 182 See table 11.1 on page 237 The marginal revenue in this instance is also downward sloping, and goes to zero at the point where total revenue peaks. Beyond this point, revenue falls as price falls.
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Types of Imperfect Competitors in Input Markets 1. Monopolistic competition 2. Oligopoly 3. Monopoly Let’s start here…
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Monopolistic Competitors Many sellers Ability to differentiate product by advertising and sales promotions Profits can exist in the short run, but others bid them away in the long run Equate MC with MR, but price off the downward sloping demand curve Page 181-184
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Short run profits . The firm produces Q SR where MR=MC at E above, but prices its products at Page 183
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Short run loss . The firm suffers a loss in the current period following the same strategy of operating at Q SR given by MC=MR at point E.
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