A.S 3.1

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.

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

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50

40

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10

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60

50

40

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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.

Behaviour of firms in other market structures SLO:

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

Product Differentiation

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

KEY

Market

Firm

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

Monopoly

KEY

Market

Firm

Monopoly: Examples

Tranz Rail Inter-island Ferry Postal delivery service: NZ post

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

Fill in the gaps table

Perfect imperfect

Many, few, two, one

Homogenous, differentiated, no close substitues

None, weak strong