Today is Tuesday, November 2, 2010.
The price of gold is $1,357.50 per troy
Exactly one year ago today it was $1,091 per troy ounce.
Examine Figure 20-1.
Figure 20-1 shows our initial market equilibrium when
we first began discussing the operation of a competitive market and a
competitive firm operating in a competitive industry, supplying a competitive
Figure 20-1 shows the market supply curve, which was the
horizontal sum of each of the 1,000 marginal cost curves of the 1,000
competitive firms making up the Arizona gold industry.
The demand curve is
the same demand curve for gold that we have been working with while we
have been discussing the competitive model.
Note that the intersection of the
market supply curve and market demand curve gives us the initial equilibrium
price and quantity in the market that we derived in Lecture 18, $600 per
ounce and 7,000 ounces per week.
Assume, like Warren Buffett,
we have the financial resources to purchase all
1,000 of the competitive gold mining firms that operated in our initial market
equilibrium scenario, and we do so.
We now have a monopoly, which literally
means "one producer".
On each of the 1,000 mine shafts that once made up
a competitive industry, we hang a sign:
Sun Devil Mining Company--Shaft
#1; Sun Devil Mining Company--Shaft #2, and so on.
Our original company
can retain our original signage:
Sun Devil Mining Company--Shaft # 212.
have, what is called in economics, a
This is no big deal;
McDonald's, Sony, Ford, and most big companies have multi-plant firms.
Note that none of the cost structures of any of the 1,000 original competitive
Our production function for the Sun Devil Mining Company
and the cost functions (remember the table of numbers?) don't change just
because we bought up all the 1,000 individual competitive firms.
shafts don't care what the name of the person is that owns them.
Notice how, unlike your textbook, and all Principles textbooks, we do not use the term
insofar as nothing in this world is perfect.
It is sufficient to obtain competitive performance in a market if
there exists a large number of firms supplying the market.
Recall that we were restricting our analysis of the gold market and gold industry to the 1,000 firms operating
in Arizona, in the same way that, even though you can buy a pizza anywhere in Maricopa County, our pizza
market model restricted our analysis to the eleven pizza producers in Tempe.
If our eleven pizza stores had
charged too much for a pizza, or ended up making significant economic profits, they would have experienced
an increase in competition from other pizza producers in the area.